U.S. home prices have surged during the pandemic with median existing home prices hitting $375,300 in March, a record with data back to 1999, according to the National Association of Realtors. Although mortgage rates have jumped sharply and sales weakened recently, odds are the market remains resilient with housing supply down to a 20-year low.
The beneficiaries from the strong housing market include near-retirees and retirees since nearly 80% of adults ages 65 years and older own their home. Even more suggestive, a majority of individuals ages 62 and over with no retirement savings or pension are homeowners, notes Shai Akabas, director of the Economic Policy Project at the Washington, D.C.-based Bipartisan Policy Center in Congressional testimony late last year. Home equity is the largest asset for people at retirement age.
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Economic security later in life can be enhanced by turning illiquid housing wealth into money to live on. There are several ways aging homeowners typically turn their home into cash. Sell and downsize into a smaller, less expensive place; take out a second mortgage; or secure a home equity line of credit. Yet the math of downsizing is increasingly unattractive with surging prices for smaller homes. A second mortgage means taking on a monthly debt obligation that has to be paid. Home equity lines of credit are typically reserved for those with high incomes and stellar credit scores.
Another alternative is the reverse mortgage, a loan taken out against the value of your primary residence. Unlike a regular mortgage, you don’t repay the loan amount and accrued interest until you no longer live in your home, usually when you move or die.
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I’ve never been a fan of reverse mortgages. It’s a complicated high-fee product with a history clouded by bad actors taking advantage of the financially vulnerable. Consumers have never embraced the main reverse mortgage product that dates back to 1989. Less than 1% of eligible homeowners have taken out one.
“Consumers are right,” says Laurence Kotlikoff, economist at Boston University, president of MaxiFiPlanner.com. and author of “Money Magic: an Economist’s Secrets to More Money, Less Risk, and a Better Life.” “The whole thing seems sleazy to me.”
Reverse mortgage abuses are sleazy. Period. But the real problem with the product done legitimately–a majority–is that it always seemed a niche product. The dramatic run-up in home prices suggests it’s time for many older homeowners to take another look. The record shows that older homeowners are more likely to take out reverse mortgages …….