Reverse mortgages have long been viewed as loans of last resort. As a result, a recent study that chronicles their growing use at younger ages “raises concerns,” says the study’s sponsor, the MetLife Mature Market Institute.
Reverse mortgages allow people age 62 or older to convert their home equity into cash. The homeowner can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner’s insurance. Until then, no payments are due.
Still, the arrangements can be risky for those who may need home equity in the future–for example, to pay for long-term care.
According to the U.S. Department of Housing and Urban Development, which oversees the federally insured loans that account for some 99% of the reverse-mortgage market, the average age of borrowers is now 71.9, down from 76.7 in 1990. In addition, the MetLife study, which analyzed data collected from September to November, 2010, finds that:
- 46% of homeowners considering a reverse mortgage are under age 70.
- Among prospective borrowers, the percentage between 62 and 64 has increased 15 percentage points since 1999, despite the fact that the loan limits are lower for younger borrowers.
- The 62- to 64-year-old crowd currently represents one in five prospective borrowers.
Are these borrowers in dire financial straits? It’s hard to know for sure, but 67% of those who have recently undergone reverse mortgage counseling–a requirement before such a loan can be approved–say they have a conventional mortgage. And 27% say they have both a mortgage and other debt, according to MetLife study.
Because borrowers must use the proceeds of a reverse mortgage to repay an outstanding conventional mortgage, those “with sizable existing debt may rapidly deplete” the home equity they withdraw through a reverse mortgage, leaving themselves vulnerable to unexpected costs, the study says.