Is Now the Time for Reverse Mortgages for Baby Boomers?

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Talk about back from the dead. About 15 years ago, so-called reverse mortgages -- which let senior citizens pull out equity from their homes to supplement retirement income -- were just about buried in bad press. Too many bad products and bad deals gave them a terrible rep, said Casey Fleming, a mortgage adviser in Northern California.

But that was then. Now there's a shift. "Reverse mortgages are becoming more popular, as baby boomers retire," said Jamie Hopkins, a professor of retirement at the American University of Financial Services in Bryn Mawr, Pennsylvania. "In the next two to three years you will see a tremendous amount more. A lot of our wealth is built into home equity. This will be a saving grace for a lot of baby boomers."

Both experts are right, but many things have happened that effectively have put reverse mortgages on the financial planning agenda for some baby boomers. The main thing is: boomers may need the money. Many are coming up woefully short when it comes to retirement savings and investments. But many have substantial equity in a home. They don't want to sell that home in many cases. Enter the reverse mortgage, which lets them pull out money to augment their other sources of retirement income. It is a loan that does not involve repayment, except out of the home's equity -- which happens only when the senior dies or moves out of the house (into assisted living, for example).

Reverse mortgages also can be structured as a lump sum payout up front or -- what experts said is an increasingly popular option -- as a home equity line of credit, drawn on as needed.

Understand: a generation ago, some seniors lost their homes in reverse mortgage deals gone bad. In other cases, after their death, heirs were dunned to make up losses on the home. Thus the bad rep -- very well deserved.

But that can't happen now, said Hopkins, who elaborated that new rules issued by the federal government provide many protections for seniors who use a so-called HECM, a home equity conversion mortgage, available only through FHA approved lenders. Among the key changes: the FHA insures the loan, said Hopkins. "It's a non-recourse loan," he said. "If money is owed at death it's covered by the FHA insurance."

Hopkins pointed to two more key changes:
  • Reduced the ability to take a large upfront sum out. "Borrowers can't pull all their equity out immediately," said Hopkins. When some seniors did that they found they had run out of money long before they were ready to leave their homes -- but they might have had to anyway. That is less likely now.
  • Income testing. "borrowers have to qualify for the HECM," said Hopkins.
Qualify for a reverse mortgage? That's not how they once were structured but, said Fleming, that lack triggered a world of pain. Low income retirees would pull income out of their home, spend it, and then, sometimes, lose their residence because they could not pay property taxes, homeowners insurance, and ordinary maintenance.

Added Fleming: "Creditworthiness is essentially not factor with a HECM, if they can meet their other obligations."

That said, noted Fleming, reverse mortgages aren't for everyone. A boomer who wants to leave a generous inheritance to his kids may flinch at a reverse mortgage because it will eat into the nest egg.

Another reason to look twice at reverse mortgages, per Fleming: "They are very expensive." He pointed to the cost of title insurance, the FHA insurance premium and an origination fee that can be up to $6,000. Those expenses quickly cross $10,000 and that is money subtracted upfront from the home's value.

And yet there also are prime cases where a HECM loan makes perfect sense, said Hopkins. He pointed to the for instance of a boomer who wants to start drawing on Social Security at the earliest possible age -- 62 in most cases. Do it then and there is a huge economic penalty (25 percent off the full retirement benefit payable at 66). Also lost is an 8 percent a year bonus for those who are 66 who delay drawing Social Security until 70. Wait until 70 and Social Security may be twice what it is at 62. Every month. That's a chunk of change. "If a HECM lets you delay getting Social Security, it could be a very sound strategy," said Hopkins.

Another case might be dealing with large dental bills (not ordinarily covered by Medicare). An HECM might be the easy way to smile.

The take-away: once scorned as predatory ripoffs, revamped reverse mortgages just may make sense for seniors whose homes are paid off (or close to it) and whose lives would be a lot more enjoyable with a steady stream of money going into their pockets from that house. They aren't for everyone -- they aren't cheap -- but they now deserve a place in retirement financial planning, Hopkins said.

This article is commentary by an independent contributor.
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