Older consumers taking out a reverse mortgage loan to get income while delaying Social Security benefits until a later age need to be careful.
The costs and risks of taking out a reverse mortgage generally exceed the increase in Social Security lifetime benefits that homeowners would receive by delaying a claim, a report by Consumer Financial Protection Bureau finds.
“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said Richard Cordray, director of the bureau. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
Most reverse mortgages are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage program. A HECM allows homeowners age 62 and older to borrow against the equity they have built in their homes and defer payment of the loan until they pass away, sell, or move out. The loan proceeds are provided to the borrowers as lump-sum payments, monthly payments, or lines of credit.
Some financial professionals are increasingly promoting the use of a reverse mortgage loan as a way to delay claiming Social Security benefits, Cordray said.
The bureau’s report cautions consumers considering taking out a reverse mortgage to delay claiming Social Security benefits. It shows that this approach carries the following risks and costs:
- Costs of a reverse mortgage can exceed the lifetime benefit of waiting to claim Social Security: The average length of a reverse mortgage loan borrowed at age 62 is seven years. By age 69, borrowers that use this strategy will pay about 60 percent in costs – interest, insurance, and fees – for the amount borrowed. Because reverse mortgages are an expensive way to delay Social Security, the report found that by age 69, the costs of a reverse mortgage loan are $2,300 higher than the additional lifetime amount the typical borrower will expect to gain from an increased Social Security benefit.
- Decreased home equity limits options to handle future financial needs: A reverse mortgage reduces the equity homeowners have in their house. Homeowners who want to sell their homes after taking out a reverse mortgage are at risk because the loan balance is likely to grow faster than their home values will appreciate. This could limit options for moving or handling a financial shock. For example, a 62-year-old homeowner who has a home worth $175,000, with a 2 percent appreciation per year, will have 61 percent of the home’s total value available as equity at age 67. By age 85, this homeowner will have only about 16 percent of equity in the home if they sell the house.
A new consumer guide and video offered by the bureau will help consumers understand how a reverse mortgage works and what the risks and borrower’s responsibilities are.
