Retiring with a Reverse Mortgage is Predicted to be the New Normal

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New research shows that the reverse mortgage will become an essential must-have tool for retirees.

The reality is that many Americans have saved very little for retirement, which will require them to tap the biggest asset: their home.

The good news is that seniors in the United States enjoy the highest rates of homeownership, with 81% of the 65+ population owning their own homes, according to a report released by the Consumer Financial Protection Bureau.

The typical U.S. household approaching retirement has nearly $140,000 in home equity, making it one of the largest assets older Americans can use to fund retirement according to the Center for Retirement Research (CRR) at Boston College.

“Accessing home equity will become increasingly important in a world where retirement needs are expanding: people are living longer and facing rapidly rising health care costs,” said Alicia H. Munnell, director of the Center for Retirement Research in a report for CRR. “The retirement system is contracting, Social security replacement rates are declining and employer-provided pensions have shifted from defined benefit plans to 401(k)s where balances are modest.”

How Can Seniors Tap that Needed Home Equity?

Reverse mortgages allow borrowers age 62 and older to borrow against the equity they’ve built up in their homes over the years.

Loan proceeds can be used to pay off existing “forward” mortgages and can be used at the borrower’s discretion as long as certain obligations are fulfilled, such as staying current on homeowners insurance and property tax.

The loan can be a boon for seniors who are on fixed incomes and are struggling to afford ongoing living expenses.

In the past couple of years, the number of senior households considered “cost-burdened” jumped from 3.1 million in 2001 to 4.1 million in 2010, according to the 2012 State of the Nation’s Housing report from the Joint Center for Housing Studies of Harvard University.

“As the baby boomers age, the number of cost-burdened seniors will likely rise sharply over the next 20 years,” the Harvard report said.

But recent changes to the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program, which consolidated some of the loan offerings in 2013, have made the product even safer for consumers, Munnell believes.

“We need this program to work well, because people are going to need the money,” she writes for The Wall Street Journal’s MarketWatch blog.

Are you considering a reverse mortgage and are interested to learn more about how the federally-insured HECM program could fit into your retirement plan?

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