Seniors Overreaching

In a recent brief the Consumer Financial Protection Bureau (CFPB) examined the financial tradeoffs of entering into a reverse mortgage at the age of 62.

The brief used an average, hypothetical homeowner to determine the reverse mortgage cost compared to the full benefits of Social Security if the consumer lives to the average lifetime expectancy, which is currently 85 years old.

If the homeowner chooses to begin drawing Social Security at 67 (rather than 62) they will receive an addition cumulative benefit of $29,640. Reverse mortgage costs, on a 7-year average, will cost around $31,900, about $2,300 less than Social Security benefits, the CFPB calculates.

The Bureau also warns that borrowers can be at risk of losing equity in their home as well, especially if they want to sell their home. If the report’s hypothetical home is worth $175,000, and homes are assumed to appreciate at a rate of 4 percent, the home will be worth about $431,325. If the reverse mortgage interest rate is 5.9 percent, the homeowner will have lost 46 percent of the equity in their home by the age of 67. By age 85, the borrower would only have 46 percent equity in their home.

This is exaggerated if home appreciation is less. Using the previous example, a home of the same price that appreciates at a rate of 2 percent, they will have only 61 percent equity in their home by the age of 67. By 85, total equity will be as low as 16 percent.

The brief notes that while this is always not the case, it is usually more beneficial to work past the age of 62 if they want to delay taking social security.

You can read the full brief here.