Retirees should strongly consider employing a reverse mortgage loan to help fund their retirements, primarily because they can serve to protect against two major problems: falling home prices, and the increasing likelihood that a senior will outlive his or her assets.
This is according to Professor Benjamin Harris, executive director of the Kellogg Public-Private Interface at Northwestern University’s Kellogg School of Management, in a column at the Wall Street Journal.
While consumers have reason to be skeptical about the ways in which such a product can help them, Harris says, there is promise in using them to overcome specific issues in retirement that should not be overlooked.
“Reverse mortgages are […] one of the more promising ways to protect against both falling home prices and outliving assets,” Harris writes. “And they can be a lifeline for retirees with a lot of home equity and not much else.”
Also serving as a proverbial feather in the cap for the product is the nonrecourse feature, which will prevent a senior, in the majority of cases, from owing more than the value of the home.
“This nonrecourse feature is potentially worth a lot to homeowners, especially if they use it exclusively as protection against a falling value of a home,” Harris writes. “Under [a] ‘ruthless’ strategy (as economists have dubbed it), borrowers initiate a mortgage, but don’t actually borrow any money unless the value of their home falls. This way, borrowers only pay a few thousand in up-front fees, but cash in if their home’s value falls.”
Even for those who may not find any real appeal in this kind of strategy for their own situations, the potential benefits of a reverse mortgage loan when employed correctly should not be overlooked, Harris says.
“Reverse mortgages can be a valuable way to protect against a dip in home value—which is the primary asset for many retirees,” writes Harris. “And because homeowners can stay in their homes indefinitely (as long as they maintain it and pay their taxes), reverse mortgages can be a sound way to protect against outliving your assets—a bit like buying an annuity that pays your rent every month for as long as you live.”
Caveats to consider include the ability for a lender to foreclose if tax and insurance payments are not made, while interest rates are also “probably too high given the limited risk taken by lenders,” Harris says. The loans can also be “a poor choice” if a senior hopes to leave their home to their heirs, he says. Still, they can be an attractive risk mitigation tool nonetheless when employed in the right situation.
Read the full article at the Wall Street Journal, subscription required. Harris also recently co-wrote a framing paper on the topic of reverse mortgages for the Brookings Institution.
