Trendspotter: Reverse Mortgages Help Retirees Capitalize on Their Biggest Asset

The Trend

Reverse mortgages are a growing potential source of retirement income. In fact, home equity represents 68% of total household assets (not including Social Security benefits) for married couples age 65, according to U.S. Census data.

For most retirees, home equity is the largest single asset they bring into retirement, even after subtracting mortgage debt, according to a 2020 study, The Market for Reverse Mortgages for Older Americans by Christopher Mayer and Stephanie Moulton. Nearly 80% of adults age 65 and older own their homes, and most have paid off their mortgages. A 2016 survey of consumer finances estimated that the median homeowner age 62 and older held more wealth in the form of home equity than in financial assets: $139,000 in home equity, compared to $101,800 in financial assets.

Further, most people age in their homes — indeed, 53% of people remain in the home they’ve lived in since their 50s. Sixteen percent stay in their homes until their 80s, according to a study from the Center for Retirement Research.

“Most households do not change residences, even over several decades,” the researchers write, concluding that “tapping home equity through reverse mortgages or property tax deferrals [is] a financially viable strategy.”

The Drivers

• Low interest rates mean it’s a good time to set up reverse equity loans.
• Growth of fee-based advisors could spur the use of home equity as part of the financial planning process.
• An aging population in need of retirement income, looking to access “trapped” equity.
• Reverse mortgages are a way to curb sequence of returns risk by giving a retirees an alternative from withdrawing from their investment accounts in a down market.
• Most reverse mortgages are home equity conversion mortgages (HECM) and government-insured, although a private industry for larger mortgages also is growing.
• New regulations in 2017 for the industry “cleaned out” bad actors.

The Buzz

Jamie Hopkins, Director of Retirement Research, Carson Group:

• Very few advisors really do a good job with incorporating home equity [into planning but] the value of the house [should be included] into their overall planning.
• FINRA talked about [reverse mortgages] as an asset or strategy of last resort. But when you start testing it, the “strategy of last resort” is almost the worst way to use a reverse mortgage. Let’s say an individual has three assets, [separately] growing at 3%, 5% and and 8%. If you’re retired, which assets do you spend first: 3%, 5% and 8% [in that order]. … Your house grows at about 3.2% historically … and maybe your equities are at 8%. That’s a traditional layout. So you shouldn’t use [home equity] as a line of last resort because it’s going to be your most illiquid [or] “trapped” equity and it’s going to grow the least amount.”
• I always suggest to advisors, [before recommending] a reverse mortgage, ask maybe five or six leading questions. You have to ask them “where do you want to live?” [If they say] “I want to age in place.” OK then, [ask] “Have you thought about ways to access your home equity as you live in here? [Have you] refinanced before? What are you planning on doing with the home? [What about] long-term funding, long-term [health] care? Are you leaving [your home] to your kids?” Those answers impact the strategy. You can start getting into [a reverse mortgage] conversation if the answers are right.

Wade Pfau, Professor of Retirement Income at the American College of Financial Services, author of “Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement”:

• The most popular option — it’s somewhere in the ballpark of 60% of the reasons for HECMs — is to not carry traditional mortgage into retirement, and refinance your mortgage into a reverse mortgage and eliminate that fixed payment in the early retirement years, when you’re the most exposed to sequence risk.
• [Reverse mortgages] allow more flexibility for the planning because they take what is otherwise an illiquid asset of the home and create liquidity for it so that you’re able strategize around spending. You’re not just spending from your investment portfolio. Now you can also coordinate between that and when you’re going to spend from the home equity. You have more flexibility and more options for how you’re going to build the retirement plan.
• It’s becoming part of the [advisory] wheelhouse, but a lot of advisors still haven’t really gotten up to speed on how reverse mortgages work today. And so they may not necessarily be real conversational [on it]. A lot of people just [see] the total return investment portfolio, not really the whole basis in terms of seeing value in things like reverse mortgages or annuities. It’s all based on recognizing that risk changes in retirement and the traditional diversified multi-asset class investment portfolio doesn’t necessarily work as well when you’re taking distributions and trying to fund a lifestyle in retirement, versus you’re just aiming to accumulate assets and build the largest pot of assets possible.

Stephanie Moulton, Professor, John Glenn College of Public Affairs, Ohio State University, author of several studies on reverse mortgages and consumer finances:

• We did see there were some spikes in demand [for reverse mortgages] around COVID. Reverse mortgages can provide liquidity to help [people] to close out of their home [mortgage]. When COVID hit, there were actually announcements from banks that they were not going to originate any home equity lines of credit, [but] reverse mortgages continued during that period. To me, it’s not surprising that there was increased interest.
• The [2018] policy reforms cut the amount of equity that people can draw from on a reverse mortgage. And that actually prevented people who would have otherwise been able to get the reverse from getting them because they may have had too much forward mortgage debt. You have to pay off all your forward mortgage debt when you get a reverse. … We know the proportion of older adults who have forward mortgage debt has doubled since the 1990s. At first, we wondered why these people aren’t getting reverses. And if you think about it from like a cash flow perspective, paying off a $150,000 forward mortgage, where you have a monthly payment, let’s say it’s $1,200, $1,700 a month. If you pay that off with the reverse, you’re freeing up that cashflow. It’s basically like an annuity because you’re giving yourself this money back, that you’ve been paying on a mortgage. And it makes sense that people were doing that. But many couldn’t because they had to pay off their forward debt.
• One drawback is [it is hard to compare loan options because] the guys who are selling the reverse mortgages are separate from the people who are selling the [home equity lines of credit], which are separate from the financial planners who might be selling other products. So you’re comparing these products in isolation rather than being able to think about them in a portfolio way. The more [we can look] at a reverse mortgages alongside these other options and then figure out which one is the right one makes sense.