A New Way for Older Homeowners to Build Equity

A report by the Brooking’s Institute said that utilizing reverse mortgages could help open pathways of wealth for elderly homeowners.

The 2016 Survey of Consumer Finance found that more than 6 million homeowners older than 62 have less than $10,000 in non-housing financial wealth, but more at least $20,000 in home equity. However, Brooking’s said this resource is largely untapped. 

“Longstanding explanations include general aversion to holding mortgage debt in retirement and a desire to leave the home as an inheritance,” the report says. 

Brookings said the federally-insured reverse mortgage is designed to help elderly homeowners, offering access to home equity with no required monthly payment and protection for homeowners. 

“Unlike a traditional forward mortgage where the balance falls over time as a borrower makes monthly payments, the balance on a reverse mortgage grows over time as interest and fees are added to the amount borrowed,” the report states.

However, less than 2% of homeowners over the age of 62 have a reverse mortgage. 

Brookings offered two possible product options to align the product to its consumers. 

Small-dollar reverse mortgages are a low-cost option targeting nearly 6.1 million homeowners whose equity in their homes in the primary asset in retirement. Second, streamlining forward-to-reverse mortgages target the more than 3 million older homeowners with a forward mortgage who could improve their housing affordability be eliminating a monthly payment. 

The report continued by saying, “ … reforms are needed that streamline the origination and servicing processes for prospective borrowers and market participants—while reducing the risk that the loan will terminate in foreclosure.” 

First American Financial Corporation reported in September that potential-existing home sales rose by 0.2%, but tenure length, especially among older homeowners, is holding the market back. 

“Rising tenure length means both fewer buyers and fewer homes on the market, and a reduction in the market potential for existing-home sales. You can’t buy what’s not for sale, and you won’t buy, if you don’t sell,” Fleming said.