Homeowners are considering reverse mortgages at younger ages, a study says, in part because they are experiencing rising debt levels. And while earlier users of the reverse loans used them to improve the quality of their lives and plan for the future, people today have more immediate and pressing financial worries.
Reverse mortgages are open to households in which the youngest homeowner is at least 62 years old. The federal government insures nearly all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program. People can access the equity in their homes and receive regular monthly payments, a line of credit, or a lump-sum payment. Proceeds of the loan must first be used to pay off any remaining mortgage a person has on their home, and borrowers are no longer required to make mortgage payments.
Once they've spent down the equity in their home, they are still entitled to live in it as long as they wish without making any mortgage payments. When they eventually leave the home, they or their heirs can either pay off any accumulated loan charges and keep the home, or walk away and let the lender have title to it.
"During the 1990s, the typical reverse mortgage borrower was between the ages of 75.2 and 76.7," according to the study, conducted by MetLife's Mature Market Institute in partnership with the National Council on Aging. "Since then, the average age of these borrowers has fallen to age 73 during 2010." The most common age of a HECM borrower in 2009 was only 63, compared with age 71 in 2006 and 73 in 2004.
The HECM program requires formal consumer counseling before borrowers can take out a reverse mortgage. The study reviewed more than 21,000 counseling sessions in late 2010 to create a profile of people interested in the program. It compared these people with those who received loans more than 10 years ago. In 1999, only 6 percent of borrowers were between the ages of 62 and 64. But in 2010, 21 percent of the counseling sessions involved people of those ages. And 25 percent of counseling sessions involved people aged 65 to 69, compared with 17 percent in 1999.
"The growing interest in reverse mortgages among homeowners under age 70 is somewhat surprising," the study said. "The amount of loan proceeds that lenders offer to younger borrowers is substantially less than the amount available to borrowers at older ages." That's because lenders assume younger borrowers will stay in their home much longer than older borrowers, and run up higher loan expenses.
One possible reason for the spike in interest among younger buyers is that they are more willing to take on new debt than older consumers, according to the study. "Another reason that younger homeowners may be interested in these loans is that they have over-extended themselves financially," it said. "When the recession hit in 2008, about 59 percent of people age 50 to 64 cut back on their spending." Only 36 percent of older consumers did so.
Consumers may also have the wrong idea of how much money they can pull out of their homes using a HECM loan. Among consumers who received HECM counseling, nearly a third had existing mortgages equal to at least half the value of their homes. People who still owe that much money on their homes would likely not qualify for a HECM loan or, if they did, would receive only modest payments.
The study provided payout examples for two types of loans: a HECM standard loan and a lower-fee HECM saver loan that the government began offering in 2010. While the fees on the new saver loan are lower, so is the percentage of home equity that a borrower can pull out of his or her home. The example in the study provided the payouts on a home valued at $250,000 that was fully owned by the borrower and carried no mortgage. Here are the proceeds for each type of loan for borrowers who are 65, 75, and 85.
HECM Standard Loan with total upfront fees and costs of $14,721
Borrowers age 65: $687 monthly advance as long as the borrower lives in the home, or a maximum line of credit or lump sum advance of $103,034.
Borrowers age 75: $900 monthly advance, or a line of credit or lump sum advance of $122,997.
Borrowers age 85: $1,319 monthly advance, or a line of credit or lump sum advance of $141,471.
HECM Saver Loan with total upfront fees and costs of $9,746
Borrowers age 65: $547 monthly advance as long as the borrower lives in the home, or a maximum line of credit or lump sum advance of $82,009.
Borrowers age 75: $697 monthly advance, or a line of credit or lump sum advance of $95,222.
Borrowers age 85: $1,015 monthly advance, or a line of credit or lump sum advance of $110,446.