Using a Reverse Mortgage to Maximize Social Security Benefits – The Risks and Benefits
In August 2017, the Consumer Financial Protection Bureau (CFPB) issued a report cautioning senior homeowners about taking out a Reverse Mortgage in order to supplement their income while delaying Social Security benefits. The CFPB found, in general, the costs and risks of taking out a Reverse Mortgage outweighed the cumulative increase in Social Security lifetime benefits that homeowners would receive by delaying their claim to benefits.
“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said CFPB Director Richard Cordray. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
The upside of using a Reverse Mortgage to maximize your Social Security benefits is that, the longer you delay filing your claim for Social Security, the more money you are eligible to draw when the time comes. However, according to the CFPB report, the additional Social Security benefits are, on average, not substantial enough to warrant the costs and potential risks of a Reverse Mortgage.
According to the CFPB, some financial professionals are promoting the use of a Reverse Mortgage to delay claiming Social Security benefits.
“With this approach, a homeowner uses a reverse mortgage loan to replace the income they would otherwise receive in Social Security benefits in the years between the minimum benefits age (62) and their full benefits age or later,” states an August 24 CFPB news release. “When Social Security benefits are delayed, beneficiaries see a permanent increase in the monthly benefit, which, based on current life expectanies, results in an increased cumulative lifetime benefit.”
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The CFPB report warns consumers about taking out a Reverse Mortgage in order to maximize Social Security benefits due to the following risks and costs:
Costs of a Reverse Mortgage can exceed the lifetime benefit of waiting to claim Social Security.
The CFPB report found that the average length of a Reverse Mortgage borrowed at age 62 is seven years. By age 69, borrowers that use this strategy will pay approximately 60 percent in costs (interest, insurance and fees) for the amount borrowed to bridge the gap in income while putting off their Social Security benefits until a later age. The report also found that by age 69, the costs of a Reverse Mortgage are $2,300 higher than the additional cumulative lifetime amount the typical borrower can expect to gain from a higher Social Security benefit.
Decreased home equity limits options to handle future financial needs.
Reverse Mortgages are loans that draw from the homeowner’s equity. Homeowners who want to sell their homes after taking out a Reverse Mortgage run the risk of having a loan balance that grows at a higher rate than their home value. This could limit options for moving or handling any unexpected expenses. For example, a 62-year-old homeowner whose home is worth $175,000, with a 2 percent appreciation rate per year, will have 61 percent of the home’s total value in equity at age 67. By the time the homeowner turns 85, they will have only about 16 percent of equity in the home if they decide to sell.
An HECM reverse mortgage is a special type of home loan that allows qualified homeowners age 62 or older to borrow money against their home’s equity and defer payment of the loan until they pass away or otherwise no longer use the property as their primary residence. HECMs can be very beneficial to some senior homeowners who wish to stay in their homes as they age and who could use extra cash to fund their retirement. However, Reverse Mortgages also carry risks and are not an ideal option for every homeowner.
At Alpha Reverse, our Reverse Mortgages are federally insured through the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program, meaning they comply with all necessary regulations to protect consumers.
Explore our Reverse Mortgage Learning Center to research this program and determine if it makes sense for you.