With Social Security suffering and most 401K’s and IRA’s down in value, Baby Boomers will need to find alternative ways to fund retirement if they are going to maintain their standard of living in their Golden Years. As a result, reverse mortgages are expected to have a bigger role in retirement funding and will likely become as common as traditional home equity loans in the near future.
Increase in “at risk” households
A recent study by the Center for Retirement Research (CRR) at Boston College determined that 61% of households in the U.S. are “at risk” of not being able to maintain their standard of living in retirement.
Home equity will be the cornerstone of funding retirement in the future
Even though the real estate market is down, home equity is still a major asset that is available to seniors to fund their retirement. According to CRR, using a reverse mortgage can reduce the number of “at risk” households by 10%.
Although many seniors are concerned about leaving an inheritance, CRR stated that preserving home equity for their heirs may be a luxury that future retirees won’t be able to afford.
The most common age of those applying for reverse mortgages has recently fallen to just over the minimum qualifying age of 62. This seems to indicate that Baby Boomers are more accepting of using a reverse mortgage to help fund their retirement.
Reverse mortgage vs. home equity line of credit
Other than selling their home (which most seniors don’t want to do), the two ways of unlocking money from a house is through a traditional home equity line of credit (“HELOC”), or through a reverse mortgage.
The two are very similar. While a HELOC is a great loan for those who are younger and still in the workforce, it is not necessarily best for older adults.
A reverse mortgage is essentially a HELOC that has been specifically tailored for those aged 62 and over. Just like a tailored suit is going to fit better than one that is off the rack, a reverse mortgage usually fits older adults better than a HELOC for two main reasons: there are no income or credit qualifications, and no monthly payments.
Need to qualify
Those seeking a HELOC need to qualify based on their income and credit score which many seniors are not able to do. Many retirees are on a fixed income which may be too low for a bank to approve a HELOC. This low income may also cause them to be late paying their monthly bills, resulting in black marks on their credit report. A low credit score may also prevent a senior from qualifying for a HELOC.
With a reverse mortgage, the lender doesn’t care about income or credit history.
Even if a senior qualifies based on their income and credit score, the HELOC will require monthly payments to be made. For a “house rich, cash poor” senior looking for help making ends meet each month, the last thing they need is another monthly bill.
Reverse mortgages do not have monthly payments. Instead, the interest on the loan is accumulated over time – like having a running tab on the house. When the home is sold, either because the senior has moved permanently to a nursing home or died, the balance owed on the reverse mortgage is repaid from the proceeds.
If you are working with a client who needs in-home care, home repairs, or can no longer afford their “regular” mortgage, you should look at a reverse mortgage and HELOC side by side. When the reverse mortgage is fully understood (see AARP’s webcast for a fair, balanced, and informative discussion of this unique loan) it is often a better solution for seniors than the traditional HELOC.
Photo courtesy of jtyerse on Flickr.
This article was edited by Abby Smith.