Why equity-tapping challenges may make reverse mortgages ‘inevitable’

Tapping into home equity, particularly for people in or near retirement, can be challenging — especially for those who may have a pressing need.

Traditional equity-tapping methods — such as selling the home or taking out a home equity loan — could present lifestyle challenges, which is where alternative options like reverse mortgages can come into play. But these products also come with their own challenges, according to a column published recently by The New York Times.

Older homeowners may contemplate the traditional methods, but depending on the person, they may be out of the question, according to financial columnist Ron Lieber.

“Your home may be just the way you like it, because you built it that way or spent decades fixing it up,” the column explained. “If you’re attached to local doctors or a house of worship, it is difficult to cut ties and move away. Clearing out years of belongings is a total pain. And an appropriate and affordable new place — no steps, minimal maintenance — may simply not exist wherever you want to be.”

Interest rates also further complicate matters if the homeowner has a more beneficial mortgage rate than is available today. And many seniors who hope to leave their home to an heir may find other challenges tied to the idea of selling.

“That brings us to reverse mortgages,” Lieber wrote. “With this product, eligible people 62 and older can extract equity in a variety of ways, say through a lump sum. Interest accrues in the background, and the balance of the reverse mortgage goes up instead of down, the way a normal mortgage would. You generally pay off the mortgage when the home is no longer your principal residence.”

But most people “reject reverse mortgages,” according to the column.

“Lenders have rarely underwritten more than 100,000 federally insured ones in any fiscal year, and that hasn’t happened since 2009,” Lieber wrote. “Many older people remember scandals involving the products, when borrowers felt misled and surviving spouses or heirs could not keep the homes. New federal protections helped clean things up.”

Considering the demographic realities, however, it may not be possible to avoid products like them.

“[R]everse mortgages or something like them seem inevitable in a nation where individuals are entirely responsible for their own retirement savings,” the column explained. “One good test for their utility is this: Do any financial advisers who pledge to act only in the best interest of their clients help members of their own family borrow in this way?”

One financial planner — Jeremy Eppley of Owings Mills, Maryland — shared the story about why he recommended the product to a client. His aunt owns her home free and clear, but inflation has encroached on her fixed income in retirement. A reverse mortgage helped improve the quality of her life, Eppley told the Times.

“I’d never heard of her going on vacation,” he said. “She could live a little.”

Other companies are engineering alternatives for tapping home equity, like shared equity investment products or sale leasebacks. But the core issue of the way that retirement financing is structured in the U.S. may necessitate a broader adoption of home equity-tapping tools, the column said.

“With home equity, we may have tipped too far into seeing homes as totems of a financial life well and conservatively lived,” Lieber wrote. “Homes are trophies, sure. But their equity is also a tool. Absent any radically improved government safety net, people without much savings are going to need more ways to extract it.”

Have A Question?

Use the form below and we will give your our expert answers!

Reverse Mortgage Ask A Question

Start Your Loan with DDA today
Your local Mortgage Broker

Apply for a Loan

Mortgage Broker Largo
See our Reviews

See All Google Reviews

Looking for more details? Listen to our extended podcast!

< Older Post Newer Post >

Check out our other helpful videos to learn more about credit and residential mortgages.

Housing supply will be impacted as more Americans age in place

By Didier Malagies • 12 Nov, 2024

There is likely to be a “modest” amount of excess home supply driven by demographic changes as older homeowners move out of their homes or die. But the aging U.S. population is not expected to be an outright source of change to home-price projections over the next 10 years, according to a newly updated report on homes owned by baby boomers . “First, based purely on changing demographics, over the next decade there was projected to be a modest amount of excess supply of homes for sale as older homeowners age and die — around a quarter million units annually,” according to the report published by the Mortgage Bankers Association (MBA). “Second, housing supply and demand shifts from changing demographics are slow moving and highly predictable, which suggests that there would not be measurable effects on house price growth from population aging and mortality.” The report projects that over the next decade, there will be a “negative excess supply of homes for sale,” which will fuel a demographic mismatch between supply and demand during that time. Much of this is driven by the fact that baby boomers, as previously documented , are not selling their homes at the same levels as previous generations. “Since 2015, there has been a sizable increase in the homeownership rate among those 70 and older,” the report said. “This, combined with a larger base of older Americans from the aging of the baby boomers, has led to a greater number of existing homes held onto longer. “In contrast, pre-2015 homeownership patterns would have predicted that these homes would have been sold. So, older Americans are holding onto their homes longer, and there are more of them.” This could serve to raise existing home supply in future years, but demand will continue to outpace supply in the here and now. “The findings highlight the varying patterns for older Americans as shifting demographics, the pandemic, and overall buyer attitudes have impacted buying and selling decisions,” said Edward Seiler, executive director for the Research Institute for Housing America and associate vice president of housing economics for the MBA “It is evident that older households are aging in place , leading to updated predictions that show that there will be no excess supply of homes to the markets from older Americans moving or dying over the next decade. The report also projects that there will be “over 8 million homes supplied by older Americans as they age and die,” which will rise to roughly 9 million over the next decade. Of that total, “approximately 1 million will be due to the death of older Americans.”

Small Business Emergency Bridge Loan

By Didier Malagies • 11 Nov, 2024

ender's 1% Down Payment program is designed to make homeownership more accessible for eligible first-time buyers by lowering the upfront costs typically required for a mortgage. Here's a breakdown of how the program generally works: How It Works 1% Down from the Borrower: The borrower contributes just 1% of the home purchase price as a down payment. 2% Contribution from Lender: Lender covers an additional 2% of the down payment, allowing the borrower to start with a total of 3% equity in the home. Eligibility: Borrowers must meet certain income and credit score requirements. The program often targets lower-income buyers or those who qualify for special financial assistance. Key Features and Benefits Low Entry Barrier: The reduced down payment can make homeownership achievable sooner for first-time buyers or those with limited savings. Conventional Loan: The loan is structured as a conventional mortgage, which may help borrowers avoid some of the restrictions associated with government-backed loans like FHA loans. Potential Mortgage Insurance: Depending on the loan details, borrowers may need to pay private mortgage insurance (PMI) until they reach 20% equity. Other Considerations Interest Rates: Rates and terms are subject to typical mortgage rate changes, so it's advisable to check the current rate before applying. Credit Requirements: There may be a minimum credit score requirement, though this is typically more flexible than for standard conventional loans. The 1% Down program can be an excellent option for buyers looking to make homeownership more affordable. tune in and learn at https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329

Will mortgage rates settle after the election ends and the Fed meets?

By Didier Malagies • 06 Nov, 2024

It’s a big week for the U.S. economy as the 2024 election takes place and monetary policymakers are meeting to decide what to do next about interest rates. For mortgage professionals who’ve been dealing with uncertainty of late, more clarity could soon emerge. Mortgage rates have been rising quickly in recent weeks, dashing hopes for growth across the purchase and refinance lending channels. According to HousingWire’s Mortgage Rates Center , the average 30-year conforming rate stood at 6.88% on Tuesday. This figure has jumped 16 basis points (bps) over the past week , 26 bps in the past two weeks and 57 bps since Sept. 18, when the Federal Reserve cut benchmark rates by half a percentage point. The average 15-year conforming rate, meanwhile, grew to 6.55% on Tuesday — up an eye-popping 27 bps in one week. Conditions aren’t expected to improve in the short term, according to HousingWire Lead Analyst Logan Mohtashami. “Mortgage rates are heading higher unless the spreads are fantastic today,” he wrote Tuesday. “The election data will create some wild swings, but the ISM (Institute for Supply Management) service report was a big beat of estimates, which made yields higher this morning after the report was released.” Some help is expected Thursday in the form of another Fed rate cut. According to the CME Group’s FedWatch tool , about 95% of interest rate traders believe the federal funds rate will be lowered by 25 bps. And there is a 77% chance of another 25-bps cut in December, which would bring the overnight rate to a range of 4.25% to 4.5%. “Assuming a 25-basis point cut in November, the September FOMC projections imply one additional quarter-point cut in December,” Sam Williamson, senior economist at First American, said in a statement. “However, additional upside surprises on inflation or employment data could influence the Fed to consider taking the December cut off the table. In contrast, accelerated economic weakness or a rapid slowdown in inflation could prompt the Fed to take a more dovish approach to policy normalization.” While Tuesday is Election Day, the results of the presidential race between Kamala Harris and Donald Trump may not be known immediately. The contest is expected to be extremely close and is likely to be decided by a handful of battleground states , including Arizona, Georgia, Michigan, North Carolina, Pennsylvania and Wisconsin. The presidential race, along with control of the House of Representatives and the Senate, could also factor into interest rate movements in the short term. Survey data released Tuesday by Redfin found that 38% of early voters factored housing affordability into their choice between Harris and Trump. About one-third of respondents believe that rates will decline during a Trump presidency, compared to one-quarter who think the same under Harris. And more respondents believe rates will rise under Harris (32%) versus Trump (28%). ICE Mortgage Technology reported this week that lower interest rates during the third quarter led to higher levels of home equity lending. Home equity withdrawals across both second-lien mortgages and cash-out refinances reached a two-year high mark in Q3 2024. But even with a collective $48 billion in originations for these two categories from July through September, ICE reported that U.S. homeowners are touching only 0.42% of their tappable equity — the amount they can borrower against while keeping a 20% equity stake in the home. The 10-year average extraction rate is 0.92%. Second mortgages are 26% below their historic utilization rate, while cash-out refis are 69% below normal. ICE noted that “elevated interest rates have been a deterrent to homeowner equity utilization in recent quarters, as 30-year mortgage rates climbed at times into the high 7% range, curtailing cash-out refinance activity, and the average introductory rate on second lien home equity lines of credit ( HELOCs ) rose above 9.5%.” If Fed policymakers continue on their rate-cutting path, however, this could make home equity loan products “more affordable and more attractive,” ICE concluded. “Since the Fed began its latest cycle of rate hikes, the monthly payment needed to withdraw $50K via a HELOC more than doubled, from as low as $167 per month back in March 2022 to $413 in January of this year,” Andy Walden, the company’s vice president of research and analysis, said in a statement.