While the media and regulators have scrutinized if reverse mortgages are suitable for older homeowners we see little if any interest in loan officers who promoted cash-out refinances or home equity lines of credit (HELOCs) to homeowners on a fixed income with little consideration of the increased financial burden of monthly payments or a payment shock when a HELOC resets.

A recent CBS News article advises before tapping into home equity seniors should consider these three questions: how much equity is available, how payment will be covered each month, and alternative sources of funds.

To the credit of CBS, their second question is one of the most consequential considerations

[read more]

that any older homeowner on a fixed income should weigh before incurring a potentially larger monthly mortgage payment. All of which brings to mind a recent webinar replay I watched.

Last week I watched a replay of KW Landmark Keller Williams Realty’s webinar ‘Ask the Pros: Is it true what they say about reverse mortgages?’. One comment during the session caught my attention. Bill Donofrio- a reverse mortgage consultant with Longbridge Financial was addressing the so-called ‘danger’ of reverse mortgages. He said, “So you talk about risk and danger. You know what’s dangerous? Having a mandatory mortgage payment. With a reverse mortgage you can make a payment whenever you want. It’s just not mandatory”.

Consider this. There’s a reason that homeowners plan and look forward to paying off their mortgage by the time they retire. It removes the burden of a monthly house payment and dramatically reduces their monthly obligations. But there’s another generally unspoken benefit: the homeowners eliminate the risk of foreclosure for nonpayment. A financial shock in retirement could impair a homeowner’s ability to stay current on their mortgage which could quickly trigger a foreclosure after three missed payments.

A 2018 survey by American Financing found 44 percent of Americans between the ages of 60 and 70 will have a mortgage when they retire and 17 percent of those surveyed don’t expect they’ll ever be able to pay it off. Thirty-two percent of homeowners predicted they would be paying their mortgage for at least another eight years. Only 20 percent of homeowners surveyed expected to pay off their mortgage within one year of retirement The Washington Post reported.

According to a 2017 Fannie Mae report, today’s older Baby Boomers born between 1946 and 1951 are more likely to carry mortgage debt into retirement than previous generations.

The calculus of retirement leaves little margin for error. Retirees with substantial monthly expenses including a sizable mortgage payment are often unable to absorb the cost of a financial shock such as unexpected medical expenses, long-term care, the loss of a deceased spouse’s income, or the resulting reduction in Social Security benefits. 

Even more, what’s disheartening is those retirees with no mortgage balance yet are unable to qualify for a home equity loan when funds are most needed for unexpected expenses. Yes, for most having a mandatory mortgage payment in retirement is a risky proposition. So also is the inability to access home equity when it may be needed most. 

Resources:

CBS News: Should seniors tap into their home equity? 3 factors to consider

The Street: Why Are Older Americans More Likely To Be Rejected for Mortgages?

AARP: Many Retired People Don’t Expect to Pay Off Mortgages

The Age Gap in Mortgage Access

[/read]