Reverse Mortgage Blog

Save Your Retirement With a Reverse Mortgage

Jonathan Clements from WSJ is an advocate of careful usage of reverse mortgage as a tool. Yes, reverse mortgage carries huge closing cost, but as Jonathan correctly mentioned, it is probably the only way to go for many cash-strapped retirees.

Today, reverse mortgages are a modest business. Consider the Home Equity Conversion Mortgage, which accounts for an estimated 90% of all reverse mortgages. In the 12 months ended September, there were only 18,097 HECM loans originated. Still, that 18,097 represented a 39% increase from a year earlier, and I suspect the number will skyrocket in the decades ahead.

The fact is, a reverse mortgage may be the only way cash-strapped baby boomers can salvage their retirement dreams. Older boomers, those born between 1946 and 1955, had a median household net worth of just $146,050 in 2001, according to an analysis of Federal Reserve data by AARP, the Washington group for seniors. Half of this net worth was accounted for by savings accounts, mutual funds and other financial assets. The other half? That would be home equity.

Claire Toth, a financial planner in Summit, N.J., is no fan of reverse mortgages. Before you consider one of these loans, Ms. Toth advises first trading down to a smaller place. That will free up home equity that can then be spent, while also reducing maintenance costs, property taxes, utilities and possibly homeowner's insurance.

But maybe you can't trade down, because your home is already pretty small, or maybe you still need the cash from a reverse mortgage, even after moving to a smaller place. "The fees are just exorbitant," Ms. Toth warns. "But if you don't have any other choice, you don't have any other choice."

Costs aside, reverse mortgages seem like a decent product. As long as you don't move or sell your house, the loan doesn't have to be repaid until after your death. At that point, the amount owed, including accrued interest, can't exceed your home's value.