The number of seniors applying for reverse mortgages is going up, according to a new study by MetLife. The study finds that not only is that number going up, but seniors are demanding reverse mortgages at younger ages.
The average age of seniors using reverse mortgages is 73, but 46% of homeowners considering it are under age 70.
Essentially, more seniors are asking for reverse mortgages earlier. What does this mean?
For one, it shows the deep impact of the housing crisis. Even for homeowners that bought before the rising prices, the effect on prices and mortgages has been felt. Seniors that live on a fixed income have seen interest rates squeeze away at their disposable cash. As a last resort, many have turned early to a reverse mortgage.
A reverse mortgage is a loan offered to seniors 62 or older that reside in the home. It allows them to borrow against the value of the home, giving up equity and increasing the debt owed. The loan, with interest, does not have to be repaid until the last surviving homeowner moves out of the property or passes away.
It’s a fast way to access capital, but you run the risk of a devaluing property and owing more than your home is worth.
The tight economic times have pushed more homeowners to reverse mortgages. More than 80,000 Americans over 62 completed a reverse mortgage in 2010.
Some 10,000 people a day reach 62 in the US, according to Gregg Smith of One Reverse Mortgage. So the number of reverse mortgages finalized will likely only increase in coming years.
What does this mean for the rental industry?
Those seniors asking for reverse mortgages are stuck in their homes unless they’re able to pay off the entire loan, with interest. That means a big chunk of potential renters are out.
And while reverse mortgages remain an option for other seniors, its unlikely they’ll be in a hurry to sell their homes and remain renters. The rental market is still most accessible to younger tenants.
But even with many seniors out of the rental market, rents continue to rise. The dual effect of increasing rents and reverse mortgages shows the trend in preferences away from ownership and towards renting.
This isn’t to say many don’t prefer owning. But the decreasing wealth in equity shown by the increase in reverse mortgages is a sign of the trouble many homeowners face. It’s true that reverse mortgages supply the borrower with easy cash that doesn’t have to be paid off for years. But that comes at the expense of equity.
Building wealth is a huge incentive for many homebuyers. But seeing the increasing trend of more senior homeowners trading in wealth for quick cash, how many still see ownership as a good way to increase equity?
For many, renting is still a better option. The generation of future homeowners is seeing what might happen in the future if they aren’t careful when buying. For today’s seniors, it’s a difficult situation to go through. But for tomorrows’ seniors, it’s a lesson in careful waiting, planning, and (for now) choosing to rent instead.
Reverse Mortgage information