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Do reverse mortgages ever make good financial sense?

Posted on June 6, 2018

It’s a good question for seniors and soon-to-be-retirees to consider: Do reverse mortgages ever work as a good source of income for cash-poor, home-rich retirees? What about using a reverse mortgage to delay Social Security benefits?

The CPAs at Teipen Selanders Poynter & Ayres say, “Reverse mortgage buyers, beware.”

According to a recent study by the Consumer Financial Protection Bureau, the “double-punch” retirement strategy of using income from a reverse mortgage on your home to postpone Social Security benefits (which makes your monthly Social Security payments higher) is flawed.

Here’s what the Consumer Financial Protection Bureau reports:

  • Reverse mortgages are costly. Besides reducing the equity older homeowners have in their homes, the expenses can exceed the lifetime benefit of waiting to claim Social Security.
  • For consumers whose main asset is their home, taking out a reverse mortgage to delay claiming Social Security may risk their financial security. That’s because the cost of the loan will generally be more than the benefit senior homeowners stand to gain from postponing Social Security.
  • Homeowners who wish 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 will definitely limit options for moving or handling a financial shock as homeowners age.

What the stats say:

  • The average length of a reverse mortgage loan borrowed at age 62 is seven years.
  • By age 69, retired borrowers that employ a reverse mortgage strategy as income will pay approximately 60 percent in costs including interest, insurance and fees for the amount borrowed to bridge the gap in income while delaying Social Security benefits.
  • The costs of a reverse mortgage loan are on average, $2,300 higher than the additional cumulative lifetime amount the typical borrower will expect to gain from an increased Social Security benefit.

Every loan requires counseling, say our CPAs, but a reverse mortgage requires doing a lot of homework, careful consideration and fact checking. Teipen Selanders Poynter & Ayres CPAs say you will need to plan out how the reverse mortgage will work in the context of your overall retirement plan.

It’s a good idea to consult with a fee-only financial adviser or a CPA before you sign any mortgage papers – especially those that work “in reverse.”