The Consumer Financial Protection Bureau is warning older consumers against taking out a reverse mortgage in order to delay collecting Social Security benefits.
In a newly released report, the CFPB finds that the costs and risks of taking out a reverse mortgage can easily exceed the increase in Social Security lifetime benefits that homeowners would receive from delaying those benefits.
For example, a homeowner born after 1960 with an expected monthly Social Security benefit of $910 at age 62 will collect $1,300 per month if he or she delays claiming Social Security benefits until age 67. Given that the average life expectancy of a 62-year-old today is about 85, this homeowner’s cumulative lifetime benefit will be $29,640 more by age 85 if she claims at 67 rather than at 62.
(Related: How Advisors Can Help Clients Age in Place)
But if the same homeowner takes out a reverse mortgage at age 62 in order to delay claiming Social Security early, by the time he or she turns 69 (seven years is the average term of a reverse mortgage), the loan costs will be roughly $31,900, or about $2,300 more than the lifetime amount of money gained from an increased Social Security benefit if the consumer lives to age 85.
In addition to potentially higher costs, reverse mortgages also decrease a homeowner’s equity, which can limit their options if they need to sell their home after taking out the loan. The decrease in home equity will likely expand over time because loan balances are likely to grow at a faster clip than home appreciation.
Here, the CFPB provides another example.
A 62-year-old homeowner has a home worth $175,000 that appreciates at a rate of 4% per year, but the reverse mortgage rate is 5.9%. At age 67, this homeowner will have a home worth approximately $212,914, and if the homeowner borrowed $54,600 from a reverse mortgage, the homeowner will have equity worth just 64% of the value of his home. By age 85, this homeowner will have only 46% of his home value available as equity.
The loss in home equity is not necessarily an issue for homeowners who remain in their home until death, but they may not be able to do so. Even if they do remain in their home until then, the home equity available to their heirs will have declined.
The CFPB suggests other options to increase income for older Americans rather than a reverse mortgage. They could work past age 62, which would not only avoid the costs and home equity decline associated with a reverse mortgage but could potentially increase their Social Security payouts. Depending on what they earn, they could substitute those earnings for lesser earnings in years past, to be used in computation for their Social Security benefits.
Consumers may also be able to increase their Social Security benefits by coordinating their claiming decision with their spouses.
The CFPB concludes its report noting that “the costs of a reverse mortgage loan will likely exceed the lifetime amount of money gained from an increased Social Security benefit, which in turn may threaten their financial security later in life.”
It has also published the Reverse Mortgage Discussion Guide to help consumers.
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