Reverse mortgages can make retirement bearable
Early in February 2011, The Harris Poll® published the results of a November 2010 survey into the personal finances of Americans. It did not make happy reading.
Perhaps most worrying of all were its findings concerning retirement savings. The fact that more than a third of people had absolutely none wasn't good, but it wasn't wholly unexpected: many so-called "Echo Boomers" (adults under 33 years) still have plenty of time to begin saving. What was truly scary was that a quarter of baby boomers (those who are 46-64 years old) and 22 percent of what Harris calls "Matures" (65 years or older) had zilch in retirement savings.
The future is only a little rosier for those who have tried to make provision. On February 19, The Wall Street Journal quoted Federal Reserve data about households headed by people aged 60-62 years who have 401(k) accounts. On average, those accounts contain only a quarter of what would be required for the household to maintain its standard of living in retirement.
No wonder then that Consumer Affairs reckons that there are 525,000 active reverse mortgages in the U.S. Or that Reuters says that the FHA wrote 25,000 new ones in the fourth quarter of 2010, up from 19,300 in the same period a year earlier. They can be a lifeline.
Reverse mortgages in a nutshell
So what are reverse mortgages? There are five main characteristics:
- They're only available to those aged 62 years or older. The greater your age, the more you can borrow.
- You choose a lump sum, a regular income and/or a line of credit from which you can draw as needed.
- You won't have to make any payments on your loan. It will be repaid--along with all the accumulated compound interest--from the proceeds of the sale of your home when you move (maybe into a retirement home) or when you die.
- Interest rates aren't generally much more expensive than current mortgage rates, but upfront costs can be high, depending on which flavor of reverse mortgage you choose. It's important to shop around.
- You can't normally be thrown out of your house no matter how long you live there or how much interest accrues.
That last point needs clarification. You are obliged to maintain the building properly, to insure it and to keep up with your property taxes. Estimates of the number of reverse mortgage foreclosures resulting from failures to comply with these requirements vary wildly, but it's possible that between 30,000 and 105,000 households with this type of loan (out of 525,000) face losing their homes.
Home equity line of credit better?
Many advisers say that reverse mortgages should be seen as a last resort. And, if you still qualify for a home equity line of credit (HELOC), you may well be better off signing up for one of those.
Of course, you would still have to make payments on a HELOC, but if you can manage those comfortably you should probably pick that option. Think of a HELOC as taking a little nibble on the financial cherry that is the equity you have in your home. A reverse mortgage is usually more of a last bite.
Taking the last bite out of your financial cherry sounds scary, but it needn't be. You do, however, need to take the process very seriously. Don't allow yourself to be seduced by glossy brochures or pressured by pushy salespeople. Instead, do your own research, and get the best possible advice from serious, independent people. Then you can face the future with confidence.