What you need to know
- Reverse mortgages can give retirees monthly tax-free payments.
- Kotlikoff was skeptical of reverse mortgages, but now compares it to an annuity.
- While these loans can be expensive and unscrupulous lenders are at risk, reverse mortgages offer protections that other loans do not.
Reverse mortgages are a controversial source of retirement cash flow. The credits come with it fees, can incriminate heirs and be a vehicle for unscrupulous lenders to defraud seniors.
But others compare it to an annuity that offers free rent long after the house is paid off. That group includes economist Larry Kotlikoff, who recently attended a webinar on reverse mortgage lending.
As a one-time opponent, he has now changed his mind.
“I was always very skeptical, probably because [RMs] seemed complicated and I always worried about people moving and paying back, which I think would be a big bill, ”Kotlikoff said in the webinar. “[However] The median home equity of people 65 and older is approximately $ 150,000 [and] That’s a large number compared to their net worth. “
With an RM, this “trapped” home equity can be used.
David Blanchett, Director of Retirement Research at Morningstar, was equally positive: “Conceptually, they make a lot of sense (obviously),” he told ThinkAdvisor in an email. “The house is one of the greatest assets for many retirees. Consideration should therefore be given to using these assets to finance retirement expenses, especially as it enables the retiree to live in the house for the rest of their lives. “
Only about 3% of retirees are currently using reverse mortgages and 5% plan to do so in the future, making them the least common source of retirement income, Blanchett says, citing the Society of Actuaries 2015 Risks and Process of Retirement Savings Survey. (These numbers barely moved in the Survey 2019.)
Advantages and disadvantages
To create an RM, customers must be 62 years of age or older and have 50% equity in their home (for a government protected RM). However, they still own their home and have to pay taxes, insurance, and maintenance for the home.
Tom Dickson of the Financial Experts Network, who hosted the webinar, pointed out some other positive aspects of RM.
- An RM enables a customer to convert that home equity, or “trapped equity” into tax-free cash.
- The most popular form of RMs (99%) are those that are supported by the federal government. For couples, only one partner needs to be 62 or older to qualify. Those aged 60 and over can qualify for proprietary reverse mortgages (or Jumbo RMs).
- Eligible are single-family houses, condominiums, terraced houses and apartment buildings with 2 to 4 residential units (whereby the owner occupies one residential unit). The house must be a primary residence.
- No monthly payment is required.
- This is the only home loan that comes with the protection of recourse that is typically found in commercial loans. For example, a couple live in a house until they die. If their heirs sell the home for more than it costs to repay the RM, they keep the sales proceeds. If the RM is greater than what they can sell home for, then the heirs (or even homeowners if they’re still alive) aren’t responsible for making up for that deficit – this is where federal housing management comes in.
In addition, RMs offer some safeguards:
1) If the customer wants to repay the loan at any time, there are no additional costs.