The Consumer Financial Protection Bureau (CFPB) issued a report this week that cautions senior citizens about taking out a reverse mortgage loan to bridge the gap in income while delaying Social Security benefits until later.
The report found that the costs and risks of taking out a reverse mortgage may exceed the cumulative increase in Social Security lifetime benefits that homeowners would receive by delayed claiming.
“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” CFPB Director Richard Cordray said. “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 (FHA) Home Equity Conversion Mortgage (HECM) program, which means they must comply with the related regulations. A HECM reverse mortgage allows homeowners to defer payment of the loan until they pass away, sell, or move out. The loan proceeds generally are provided to the borrowers as lump-sum payments, monthly payments, or as lines of credit.
Some financial professionals are promoting the use of a reverse mortgage loan to delay claiming Social Security benefits. With this approach, a homeowner uses a reverse mortgage loan to replace the income they would otherwise receive in Social Security benefits in the years between the minimum benefits age (age 62) and their full benefits age or later. When Social Security benefits are delayed, beneficiaries see a permanent increase in the monthly benefit, which, based on current life expectancies, results in an increased cumulative lifetime benefit.
However, CFPB said the 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 pursue this strategy will pay approximately 60 percent in costs (interest, insurance, and fees) for the amount borrowed to bridge the gap in income while delaying Social Security benefits until a later age. By age 69, the costs of a reverse mortgage loan are $2,300 higher than the additional cumulative lifetime amount the typical borrower will expect to gain from an increased Social Security benefit.
A reverse mortgage also reduces the equity homeowners have in their house, the report said. Homeowners who wish to sell their homes after taking out a reverse mortgage are particularly 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.
The CFPB is also releasing a new consumer guide and video designed to help consumers understand how a reverse mortgage works, associated risks, and the borrower’s responsibilities.