The reverse mortgage has become an increasingly popular financial option for seniors in the United States. A reverse mortgage allows homeowners who are at least 62 years old to convert part of their home equity into cash. Unlike traditional mortgages, borrowers do not need to make monthly payments; rather, repayment occurs only when the borrower passes away, sells the house, or moves out permanently.
Reverse mortgages can be an excellent solution for seniors who require extra income during retirement. But it is essential to comprehend the history and statistics surrounding reverse mortgages before making a final decision.
History of Reverse Mortgages
The concept of a reverse mortgage dates back to the 1960s, when a savings and loan association in Portland, Maine offered its first “reverse annuity mortgage” to a widow who needed additional income. After her passing, this product quickly spread and other lenders started providing similar products.
In 1987, the Federal Housing Administration (FHA) introduced the Home Equity Conversion Mortgage (HECM), which remains today’s most popular reverse mortgage type. This type of reverse mortgage is insured by FHA and has specific eligibility criteria such as age and home value that borrowers must meet to be approved.
In the early 2000s, reverse mortgages saw a resurgence in popularity due to rising home values and an aging baby boomer population reaching retirement age. Unfortunately, the 2008 housing crisis had an enormous effect on this industry as many borrowers found themselves owing more on their reverse mortgages than their homes were worth.
Since then, the reverse mortgage industry has undergone significant transformations. The FHA implemented new regulations and performed financial assessments to guarantee borrowers can meet their obligations, leading to greater stability and security within this space.
Statistics on Reverse Mortgages
According to data from the National Reverse Mortgage Lenders Association (NRMLA), 49,000 Home Equity Conversion Mortgage (HECM) loans were originated in 2020, representing a decrease of 7.7% compared to 2019. The total amount of these HECM loans originated that year totaled $11.7 billion, an increase of 6.2% over 2019.
In 2020, the average age of a HECM borrower was 72.8 years old, with an average home value of $301,272. The average initial disbursement amount was $155,565.
When it comes to reverse mortgage usage, the most popular purpose is usually paying off existing mortgage debt and then using the proceeds for home repairs and improvements. Only a small percentage of borrowers use their funds for discretionary expenses such as travel or entertainment.
For 2021, HECM loan limits are $822,375 in high-cost areas and $356,362 elsewhere. However, borrowers are only entitled to a portion of their home equity based on age, property value, and interest rates.
Rates on HECM Reverse Mortgages
As of March 21, 2023, HECM reverse mortgage rates are as follows:
Fixed Rate:
6.808% (8.094% APR),
6.830% (8.287% APR),
6.930% (8.420% APR),
7.060% (8.564% APR).
Adjustable Rate:
6.090% (1.750 Margin),
6.340% (2.00 Margin),
6.590%(2.250 Margin).
6.840% (2.500 Margin)
The interest rate on a reverse mortgage can have an immense effect on how much money borrowers receive. A lower interest rate means more money for borrowers while higher rates mean less. Furthermore, those choosing fixed rates will receive one lump sum at closing while those opting for adjustable rates have the option of receiving either a line of credit or monthly payments.
It is essential to be aware that interest rates on reverse mortgages tend to be higher than those for traditional mortgages. This is because the loan cannot be repaid until the borrower passes away, sells their home, or moves out permanently; consequently, lenders assume the risk of outliving their loan.
Pros and Cons of Reverse Mortgages
Are you thinking about taking out a reverse mortgage? Here are some pros and cons to consider.
Reverse mortgages, like any financial product, offer both advantages and drawbacks. Here are some of the pros and cons to take into account before determining if a reverse mortgage is right for you:
Pros of a Reverse Mortgage:
Provides additional income during retirement
Does not require monthly payments
Can be used to pay off existing mortgage debt
Allows borrowers to stay in their homes
Cons of a Reverse Mortgage:
Interest rates on traditional mortgages tend to be higher than those offered by alternative lending sources, and fees can also be more costly. On top of that, borrowers must continue making payments for property taxes, insurance, and maintenance despite rising costs.
Before pursuing a reverse mortgage, it is essential to carefully weigh the pros and cons. Consulting with a financial advisor or housing counselor may help you fully comprehend both costs and advantages associated with taking out this type of loan.
Reverse Mortgage Conclusion
Reverse mortgages can be an excellent financial resource for seniors who require extra income during retirement. But it’s essential to comprehend the history and statistics surrounding reverse mortgages, as well as their pros and cons before making a final decision. By carefully weighing costs against benefits, borrowers can make an informed decision about whether a reverse mortgage is right for them.
