Apr 12, 2023
A recent national survey found 89% of Americans aged 60 to 75 answered "yes" to there being a “retirement savings crisis.”
"The retirement savings crisis is a real thing," Chris Moschner, chief marketing officer of American Advisors Group, said in a press release. The lending company conducted the survey of over 1,500 people across the country.
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A majority of survey respondents appear to be responding to the crisis by cutting back on non-essential spending — including dining out (80%), travel (71%) and entertainment (62%) — in order to save money. But some homeowners have been tapping into their home equity through reverse mortgages.
Thanks to increasing home values, housing wealth among Americans aged 62 and up has hit a record $11.81 trillion, according to the National Reverse Mortgage Lenders Association. The number of home equity conversion mortgages (HECM) — which accounts for nearly all reverse mortgages — created annually has also been on the rise since 2019.
A reverse mortgage might seem like a convenient solution if you need spare cash to help cover your bills, but it’s not for everybody. There are some caveats to keep in mind before applying.
Grappling with a savings crisis
Close to half of seniors feel they haven’t saved enough to retire comfortably, while nearly 6-in-10 say they’re only somewhat optimistic or not optimistic at all that their savings will last them through retirement, according to the survey.
Even though seniors received an 8.7% cost-of-living adjustment (COLA) to their Social Security benefits this year, experts caution this may not be enough.
“Indications are that the COLA will not reflect pockets of persistently high inflation affecting retired and disabled Social Security recipients,” Mary Johnson, a Social Security and Medicare policy analyst at The Senior Citizens League, said in a September press release. “That puts tens of millions of retirees at risk of continuing to fall behind.”
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It’s becoming more expensive to borrow as well — the federal funds rate was hit by another quarter-point hike in March, affecting everything from credit cards to car loans.
With expenses seemingly increasing across the board, Americans have less in spare funds left over for their savings and may be considering alternate avenues to make ends meet.
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Can a reverse mortgage help?
A reverse mortgage allows homeowners who are 62 or older, among other requirements, to convert some of their home equity into cash. The reverse mortgage lender basically pays you for a stake in your property while you keep the title and get an advance on your equity.
These payments aren’t taxable and won’t affect your Social Security or Medicare benefits, and typically you won’t have to pay the lender back until you either move out, sell the property or die.
In the event of your death, your spouse or children will need to pay off the balance. In many cases family members decide to sell the home or choose to refinance into a new loan to keep the property.
The amount of money you qualify for depends on factors like your age, the value of your property and the type of reverse mortgage you get. For example, an HECM — which is backed by the federal government and gives you more flexibility in the payment plan — is limited by the appraised value of the property and capped by the FHA mortgage limit of $1,089,300.
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Many people use the funds for living expenses, home renovations or leisure, but your spending freedom could be restricted based on the type of reverse mortgage. For example, while HECMs are fairly flexible, single-purpose reverse mortgages only let you use the money for a specific purpose that must be approved by the lender.
What you need to look out for
Keep in mind, the property subject to a reverse mortgage must be your primary residence and you either have to own it outright or have paid off a significant amount of the loan. You also can’t be delinquent on any federal debt and must be able to pay off the usual costs that come with maintenance, like property taxes and repairs.
If you can’t meet those obligations, you risk defaulting on the reverse mortgage and losing your home to foreclosure.
In addition, there are several fees involved, like origination fees, service fees and closing costs — plus mortgage insurance premiums. And you won’t be able to claim a mortgage interest deduction on your taxes either.
While a reverse mortgage isn’t considered taxable income, it could potentially affect whether you qualify for need-based government programs like Medicaid or Supplemental Security Income.
Consider speaking to an expert first to determine whether this is the right option for you, and look into other alternatives, like a home equity loan.
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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
