For those who've saved -- but not quite enough -- for retirement, there's a potential solution right under foot. According to the Federal Reserve, household equity in real estate for Americans is about equal to their combined retirement savings: more than $18.5 trillion in the third quarter of last year.
Yet most older homeowners remain uninterested in a reverse equity mortgage, which is specifically designed to allow older homeowners to borrow against the value of their equity, without having to pay back a penny until they move or die. The dominant reverse mortgage you can get is called a home equity conversion mortgage, and it is insured by the Federal Housing Administration. In fiscal year 2019 there were fewer than 32,000 new HECM loans issued.
Why? A historically flawed product, and program, have generated plenty of healthy skepticism.
For years, reverse mortgages were marketed as easy ways to meet any financial goal -- wipe out credit card debt, buy an RV -- without sufficiently vetting borrowers to make sure they could actually afford to do this. While a reverse does not require any payback until a borrower dies or moves (and the amount owed can never exceed the market value of the home), homeowners must still make all property tax payments and are on the hook for maintenance and insurance. Not carefully vetting borrowers to see if they could keep up with these costs led to some reverse borrowers being forced to sell their home and having no equity for their next home.
Another black eye was that many older reverse mortgages put spouses at risk. Many earlier reverse mortgages only listed one borrower. When that borrower died, or had to move to a care facility, repayment of any borrowed money was due. If the other spouse didn't have the cash to pay back the borrowed amount, the only solution was to sell the house to settle the reverse mortgage, leaving the surviving spouse in a precarious financial situation.
That risk has been pretty much eliminated with new regulations that went into effect a few years ago. That change is part of a number of tweaks to the FHA reverse mortgage program that make it less likely that unqualified homeowners will be able to get a reverse mortgage, or be able to borrow a big lump sum, which is often the beginning of problems. (Most reverses are now a line of credit that can be tapped on an as-needed basis.)
But even a cleaned-up program with more consumer protections built in can't overcome what is believed to be a major hurdle in why equity-rich homeowners aren't interested: the prospect of tapping all your equity and then having to move later in life. Without any remaining equity, the well-founded fear is that you won't have money to pay for assisted living or a nursing home.
New academic research might allay that fear. Using government data back to 1992 that tracked homeowners aged 50+, the Center for Retirement Research at Boston College estimates 70% of the households tracked either never moved or moved just once, right around the time they retired. That suggests that based on historical trends, most people don't have to worry about a later-life move.
The researchers estimate that just 16% of homeowners who stayed put, or who proactively moved in their 50s/60s, then made a move to a rental or care facility in their 80s. (The remainder are "frequent movers" in retirement, who would not be good candidates for a reverse mortgage.)
Granted, a nearly one in five chance of needing to move is not nothing. But the message of the academic research is that many households would not be at a risk if they tapped a portion of their home equity in retirement.