The rapid levels of home price appreciation (HPA) observed over the past several years likely means that those at or near retirement may want to take another look at reverse mortgages, since chances are that the levels of home equity many seniors have built up might make such an option worth exploring for the longevity of cash flow.
This is according to MarketWatch column by Chris Farrell, the senior economics contributor at Minnesota Public Radio with a nationally-syndicated personal finance radio program. Farrell has never been particularly enamored with the product category in the past, but a few recent developments are causing him to acknowledge their potential when utilized as part of a retirement plan, he says.
“I’ve never been a fan of reverse mortgages,” he writes. “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.”
However, while abuses of the product should be differentiated and punished, economic realities for seniors could make the product worth exploring, he says.
“The dramatic run-up in home prices suggests it’s time for many older homeowners to take another look,” he says. “The record shows that older homeowners are more likely to take out reverse mortgages when home prices are high, perhaps as a way to lock in equity values. Higher home prices also mean more people will qualify for the loan. Although I still can’t wax enthusiastic about the product, reverse mortgages are worth the time to research and consider.”
Farrell enlists the perspective of several reverse mortgage subject matter experts to further build out his point, including Longbridge Financial CEO Chris Mayer, and Stephanie Moulton, faculty director for research at the John Glenn College of Public Affairs at the Ohio State University.
Some seniors who begin to entertain the potential utility of a reverse mortgage should keep in mind that it is a loan, and can supplant an existing forward mortgage payment with another kind of debt, Moulton says to the outlet.
“But the way it’s structured, you end up with more cash flow,” she says.
The disproportionate levels of housing wealth to cash reserves likely help to make reverse mortgages more worthy of consideration, Farrell writes.
“Reverse mortgages without additional reforms are probably too complicated to move from the retirement product tributaries into the financial mainstream,” he says. “Nevertheless, odds are reverse mortgages will play an increasingly larger role in generating income for cash-poor and asset-rich aging homeowners.”
Read the column at MarketWatch.