Baby Boomers who are gearing up for retirement are finding themselves increasingly unprepared and underfunded to an extent never imagined by past generations.
According to Social Security Administration and the U.S. Department of Labor, the majority of senior Americans are relying on Social Security benefits to supply as much as 80% of their retirement income with average yearly payout totaling only $12,000 a year.
Further, the average cost of 20 years worth of retirement equals about $459,000, and that figure only includes housing, meals, and medical expenses after Medicare coverage. Yet the average pre-retiree couple has an average of only $60,000 in savings today.
Experts suspect that one alternative and relatively new income strategy that allows senior homeowners to convert the equity in their home into a cash loan, known as a reverse mortgage will continue its already explosive trend in popularity.
Reverse mortgages have become more common because the sophisticated financial transaction allows seniors to stay in their homes and draw on a loan that’s secured by the home’s equity. Participating seniors must be at least 62 years old and own their home outright.
But a reverse mortgage is no golden ticket, either. Critics of the Home Equity Conversion Mortgage, the formal name for the loan given by the US Department of HUD, cite consumer complaints of exorbitant up-front fees, complicated terms seniors don’t understand and inadequate counseling by the lenders.
The reverse mortgage industry has been working hard to alleviate those issues in the last few years, much of which has been a side effect of exponential growth in an industry. But oversight of the industry is strengthening. The Federal Housing Administration has set aside millions to beef up their counseling program that all potential borrowers are now required to undergo.
In addition, reverse mortgage lenders have adopted their own ethics committees and have drastically reduced and in some cases completely waived up-front origination fees. Despite the lender’s best advocacy efforts, there’s one challenge that is out of the control of both lenders and borrowers alike: interest rates.
One critical factor in determining the amount of reverse mortgage funds available is the interest rate, and more directly, the Expected Rate. For a fixed rate loan, this is the actual rate, while for an adjustable rate, this is the 10yr LIBOR Swap in most cases. Once the Expected Rate goes over 5.06%, a benchmark rate for the fixed rate HECM, the customer gets less funds. The effect of a rising rate on the total available funds is far greater than the effect the borrower’s age has on the loan. And in many cases, lenders are able to offer to up-front price cuts even at the current low rates.But if the rates on the HECM fixed product increase, those aggressive up-front price cuts would likely come back for borrowers at the same time the principle limits of proceeds borrowers qualify for falls.
The bottom line, says Jim Cory, the CEO of Legacy Reverse Mortgage, is that as long as interest rates are rising, the benefits for borrowers is falling. “Rates could continue on this upward swing”, says Cory, “so now is the time for seniors who are serious about taking advantage of this product to give it a close look.”