With their retirement portfolios dwindling, baby boomers look to tap into their largest asset—their homes. But are reverse mortgages right for everyone?
Are more seniors, baby boomers and even advisors taking a fresh look at reverse mortgages? Perhaps.
A recent study by the MetLife Mature Market Institute found that younger seniors are now seeking a Home Equity Conversion Mortgage (HECM), otherwise known as a reverse mortgage (RM).
In 1990, the average age of a reverse mortgage borrower was nearly 77; in 2010, it stood at 73, according to statistics from the U.S. Department of Housing and Urban Development (HUD).
MetLife's report, "Changing Attitudes, Changing Motives: the MetLife Study of How Aging Homeowners Use Reverse Mortgages," done in conjunction with the National Council of Aging (NCOA), uncovered a similar downward drift. Between September and November 2010, the average age of homeowners who went through the required counseling for a reverse mortgage was 71-and- a-half years old. Furthermore, nearly half— 46 percent—of homeowners considering a reverse mortgage are under age 70. Contrast that to the 1990s, when the age of the typical reverse mortgage borrower ranged between 75 and 76, reports MetLife.
Even baby boomers are casting an eye toward reverse mortgages now. According to MetLife, the percentage of prospective RM borrowers in the 62 to 64 age group has climbed 15 percentage points since 1999, despite the fact, as the report points out, younger applicants have had lower available loan limits.
Why the shift? Blame the recent recession that has devastated many a retirement portfolio. Another reason is simply that baby boomers are coming of age when they can qualify for a reverse mortgage—62, points out Barbara Stucki, Ph.D., vice president for home equity initiatives for NCOA in Washington, D.C.
They also have endured a historic economic meltdown and therefore, are looking to their home equity as a means to lift themselves out of financial straits, she adds.
Statistics from the MetLife study underscore that trend. A clear majority—67 percent—undertake a reverse mortgage as means to reduce debt, an indication it's needed to meet an immediate financial need. However, back in 2006, an AARP study on reverse mortgages cited by MetLife found that 70 percent said they did so to improve their quality of life. Another 73 percent cited the need to plan ahead for unexpected emergencies.
In other words, there appears to be a perfect storm brewing—baby boomers qualifying for the program at a time when they need to restock their retirement portfolios—that may make reverse mortgages a more widely utilized financial strategy. But are consumers and advisors ready to take advantage of RMs? In Senior Market Advisor's 2012 Senior Survey, roughly 86 percent of respondents had no interest in pursuing a reverse mortgage.
"Rather than treating a reverse mortgage like the plague, advisors should think of it as another arrow in the quiver."
~Rick Kahler, Kahler Financial Group
"Orderly draw down"
Most financial planners are not big fans of reverse mortgages, either, or at least weren't until recently. Stucki says that is understandable, given that the goal of a financial advisor is to preserve a client's assets. "So by definition, they're not going to want to tap into the home," she says.
However, two factors have come into play that should make an advisor more open to a reverse mortgage: a volatile stock market and increasingly longer life spans, Stucki says.
"A lot of financial advisors are still recommending that a home equity loan in general and reverse mortgages in particular only be used as a last resort," she says. "I think it's very important that financial advisors look carefully at whether this is the best advice to give their clients."
Instead of focusing solely on asset preservation, an advisor should also aim for an "orderly draw down" of assets to mitigate longevity risk, Stucki says. "Home equity will need to be part of the solution."
Rick Kahler, president of Kahler Financial Group in Rapid City, S.D., says that he has sensed more "openness" on the part of financial advisors like himself to recommending a reverse mortgage to clients in certain situations.