By Mathew Allen MLO-254296
According to research completed by Steven Sass, a research economist with the Center For Retirement Research, retirees are likely to tap home equity only after experiencing a late in life financial shock. In his academic brief, Sass explains several issues as to why home equity is underutilized and why downsizing and reverse mortgages may be the answer seniors are looking for.
Downsizing during retirement can provide several benefits which may include, lower property taxes, lower homeowner’s insurance, smaller utility bills and less maintenance costs. Those cost savings can be repurposed for medical care, entertainment or travel. Downsizing can also reposition assets from home equity into liquid retirement accounts.
While downsizing and shedding your excess housing can strengthen finances, very few retirees actually take advantage of this option. A study cited by Sass shows that only 3% of people approaching retirement plan on downsizing.
The rational reasons not to downsize include the costs of selling and moving to a new home and of course the most common being they want to remain in their current home. However, there are some irrational behavioral reasons, such as not being able to assess the benefits, giving excess weight to near term costs while minimizing long term gains and excessively valuing what one has.
Given the fact that very few retirees plan on downsizing, the reverse mortgage is an attractive way to access and utilize housing wealth. A reverse mortgage can provide a source of reserve funds, additional cash flow, as well as pay off a current mortgage and other debts. Conventional loans or home equity loans are an option; however, they are not near as useful since they require monthly payments.
The utilization of reverse mortgages is even less than those using the downsizing option. It is estimated that only 2% of eligible borrowers have utilized a reverse mortgage. Sass states the low participation rate is due largely to informational barriers and limited product knowledge. Also, due to the complexity of the reverse mortgage, households are more inclined to do nothing, unless forced to explore this option due to financial hardships.
Only exploring the reverse mortgage due to financial hardships is why it is often referred to as the loan of last resort. Unfortunately, this is how the majority of borrowers utilize this loan option. The reality is that there have been multiple studies that show getting the reverse mortgage early in retirement, even if it is not needed, can provide substantial benefits and are generally worth the cost.
If your home’s equity is the largest asset you have during retirement. It can be a smart move to look into how it can be utilized to reduce risks, improve cash flow and increase the quality of your retirement. Do not wait for a financial shock to force you into exploring your options because it might be too late.
Call me today for a free custom tailored reverse mortgage analysis at 541-773-3131. Or give me a call with any questions you may have about the loan. I am happy to help in any way I can.
I look forward to hearing from you.
Matt Allen MLO-254296
Sr. Reverse Mortgage Banker
Phone: (541) 773-3131
Toll Free: (888) 382-9590
Fax: (541) 773-4981
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