People who have already retired or who are getting close to that point are very clear about one thing: They don’t want to move from the homes they’re currently living in.
However, they’re nowhere near as clear about something else that seems to promise them the opportunity to do just that: reverse mortgages.
The “Home Equity and Retirement Income Planning Survey” from The American College of Financial Services found that a huge majority—83 percent—of respondents don’t want to relocate in retirement. Practically none of them have any interest in renting, either.
But when it comes to reverse mortgages, they’re not quite so savvy on what such strategies entail.
The survey asked 10 questions about reverse mortgages, to gauge respondents’ understanding of them, and 10 percent answered all 10 questions incorrectly. Just 30 percent achieved a passing grade.
And this was despite the fact that 44 percent have considered using home equity in retirement. In addition, respondents thought they were more knowledgeable on the subject than they actually were.
They are hesitant about plunging in, though, despite their belief in their “knowledge” about the topic.
Only 14 percent had considered getting one, and just one respondent had actually done so. And they have a slightly negative view of reverse mortgages as a retirement tool—perhaps a smart thing, considering their overall lack of knowledge on the topic.
Only 25 percent feel comfortable spending home equity money as a source of income. Interestingly, only about 20 percent of respondents felt it extremely important to leave their home as a legacy asset to their children or other heirs; 45 percent said that it was not important.
And that’s probably a good thing, since heirs can have problems paying off the debt in order to reclaim the home on the death of the mortgagee.
Although reverse mortgages don’t need to be paid back by the owner (unless there is the intent to leave the home to heirs), there are other factors to be considered.
Closing costs for reverse mortgages can be high, compared with conventional mortgages, and there can be charges for mortgage insurance—on top of property taxes and homeowner’s insurance, for which the mortgagee is still liable.
Lots of other fees can be added on to the transaction, such as origination fees, appraisal and credit report fees and even a service fee. All of these can eat away at the money one might expect to get from a reverse mortgage.
In addition, homeowners may find that they are unable to get another loan, should they need to replace a car or do any major repairs on the home—and the money from a reverse mortgage can even affect Medicaid benefit eligibility.
Then there’s the issue of whether a surviving spouse can remain in the home if the spouse taking out the reverse mortgage dies. Horror stories about that have resulted in Department of Housing and Urban Development action on behalf of surviving, non-borrowing spouses.
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