A comprehensive new study from the MetLife Mature Market Institute shows the age of those seeking Home Equity Conversion Mortgages (HECM), popularly known as reverse mortgages, has plummeted in the four years since the collapse of the housing market in the U.S. It also reports that these mortgages, special types of home loans that allow people to draw on home equity without monthly mortgage repayments, have evolved into a way for many older Baby Boomers to help manage urgent financial needs. Boomers age 62–64 currently represent one-in-five prospective borrowers of the product, which was once associated with a much older age group.
Changing Attitudes, Changing Motives: The MetLife Study of How Aging Homeowners Use Reverse Mortgages, produced in conjunction with the National Council on Aging (NCOA), reports that the average age of those who have gone through reverse mortgage counseling has declined and is now 71.5 years of age. The U.S. Department of Housing and Urban Development (HUD) reports a similar decline in the average age of borrowers to age 73. Forty-six percent of homeowners considering a reverse mortgage are under age 70. The percentage of 62- to 64-year-olds who are prospective borrowers has increased 15 percentage points since 1999, despite the fact that younger applicants have had lower available loan limits.
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The study concludes that older homeowners will need assistance and consumer education to ensure that they make wise decisions about the most appropriate use of their “nest egg” of home equity. To that end, a consumer guide, The Essentials: Reverse Mortgages, accompanies the study and is available free to the public. It is aimed at helping potential borrowers learn more about the product and its implications for their finances.
Data for the study was collected by HUD-approved counselors as part of mandatory counseling for all reverse mortgage applicants. Between September and November 2010, counselors completed 21,240 of these counseling sessions.
About two-thirds (67%) of recent counseling clients also have a conventional mortgage that will need to be repaid if they decide to take out a reverse mortgage, the study found. About one in four (27%) reported having both housing and non-housing debt. Borrowers with sizable existing debt may rapidly deplete home equity.
“Consumer attitudes about reverse mortgages are changing because the recession has eroded confidence about retirement security and Americans will rely more and more on these measures,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. “As reverse mortgages do not have income requirements and since other forms of credit have become less accessible, these loans will become more attractive, though it is worth noting that the Department of Housing and Urban Development (HUD) stated recently that lenders may conduct financial assessments of applicants to ensure that they have the ability to meet their loan obligations.”
“While the economic downturn may be a major reason borrowers have begun to use this financial option for debt management, in the future it is likely that tapping home equity will be viewed as part of the entire retirement planning process," said Barbara Stucki, Ph.D., vice president for home equity initiatives for NCOA. "It is likely the reverse mortgage option will be considered alongside some of the more traditional methods of saving and investment.”
The report provides the following information for consumers, financial advisors and others counseling older Americans.
- Loan Types — Potential borrowers need to understand the pros and cons of loan options, features and costs for their personal financial situation. With recent changes, including lower loan limits, the introduction of a fixed-rate HECM, and a new loan option (“HECM Saver”), reverse mortgages are no longer a one-size-fits-all solution.
- Revise Outdated Thinking — Based on their experience with conventional loans, consumers may believe a fixed rate is preferable to an adjustable rate HECM. But a fixed rate HECM can be more costly and potentially offers less flexibility than an adjustable-rate mortgage (ARM) HECM loan. In addition, lenders may now offer reverse mortgages with minimal upfront costs, which can make this loan attractive for more short-term needs.
- Clarify Confusing Concepts — Although borrowers need to pay off existing debt on their homes to get a reverse mortgage, by transferring this debt to the reverse mortgage loan obligation, they are only deferring the repayment of these mortgage payments (with interest) until they die or move out. Borrowers must also meet all of their other reverse mortgage obligations including making timely property tax and homeowners insurance payments.
- A Holistic Approach — Borrowers may benefit from involving other professionals in decision-making as appropriate, including legal, financial and tax advisors. They may also consult with medical advisors to provide input on health challenges that could make it hard to stay at home.
- Exit Strategy — Reverse mortgage borrowers can stay in the home as long as they wish. But sooner or later the loan will have to be repaid. Financial advisors, senior advocates, housing specialists and other experts will need to work together to develop scenarios with appropriate exit strategies to guide consumers through these transitions.
- Now or Later? — Whether to integrate home equity into ongoing retirement financing or to preserve this asset for major unexpected expenses in the future is a common question. Homeowners may choose to use home equity to pay for home repairs, or to pay off tax burdens. In some situations, a reverse mortgage may help stabilize a difficult financial situation such as forestall a foreclosure.
- More Than a Last Resort? — Using home equity as more than a “last resort” can help keep cash shortfalls from becoming major problems, but the growing trend toward borrowing at earlier ages also raises concerns. Aging Baby Boomers, likely to live longer than their parents, may not have saved enough for their additional retirement years. Consequently, seniors they may need to preserve a portion of their home equity.