Study: Reverse mortgages may be good for elderlyWEST LAFAYETTE, Ind. -- Using the equity in their home as a source of income is a viable option that many older homeowners may be overlooking, according to a Purdue University expert.
Reverse mortgages allow older people to borrow the equity they have in their home. But unlike a traditional home-equity loan, the money borrowed is not repaid in monthly installments. Instead, the homeowners remain in their house and receive income until they die or the loan is terminated. Then, the home is sold and the bank is repaid all cash advances plus interest from the proceeds of the sale.
The practice is not new -- but it may be under-used, says Flora Williams, associate professor of family and consumer economics and a certified financial counselor.
She says reverse mortgages can relieve cash flow problems for some elderly and are a reasonable alternative to purchasing expensive long-term care insurance. "We may be doing older citizens a disservice by not providing them enough information about the advantages of reverse mortgages," Williams says.
She looked at the 1989 government Survey of Consumer Finances to see how much potential income would have been available to older homeowners if they had utilized reverse mortgages. Her findings show substantial funds available, with the average elderly homeowner having the ability to tap into more than $88,000 of home equity.
She speculates that these assets go unused for many reasons. "Older persons don't like to take risks. They may feel uncomfortable borrowing against the worth of their homes, even though some reverse mortgages allow them to stay there until they die," Williams points out.
Some older people also desire to leave their home as an inheritance to their offspring. "The notion that parents ought to leave a large inheritance to their children may be inappropriate," she suggests. "That may be particularly true for those persons who are rich-in-house and poor-in-cash."
Based on the type of reverse mortgage, Williams' study showed the potential increase in annual income available to the average 72-year-old homeowner ranged from just over 13 percent to nearly 19 percent.
"Elderly householders could have realized average monthly payments of $427 if they had borrowed on a 10-year-term reverse mortgage and $305 if they had borrowed with a lifetime tenure type of reverse mortgage," she says.
A term option on a reverse mortgage gives the borrower monthly payments for a fixed period of time, with a lump sum repayment required at the end of the loan period. It's riskier, because the owner could outlive the loan, she says, but it also provides more income.
A tenure reverse mortgage provides monthly payments for as long as the owner lives in the home. Potentially these payments could exceed the total value of the home, but Williams notes that in practice, they rarely do.
The elderly also may use a reverse mortgage as a line of credit, choosing to use the funds only when needed for health care or other major expenses.
"Home ownership is the greatest source of wealth available to most elderly persons," Williams says. Statistics show that in 1992, three-quarters of persons over age 65 owned their own homes, and approximately 80 percent of those homes were mortgage-free.
While reverse mortgages may be advantageous in many instances, Williams says the income realized from them may not always be significant. "Financial professionals need to weigh the added income from them against the interest rate, fees and other costs of the loan. And as always, it pays to shop around," she says.
Reverse mortgages take into account factors such as marital status, gender and age. Williams says that in general, the oldest, the unmarried and the low-income have the most to gain from reverse mortgages. On the other hand, she says, married couples probably have the least to gain.
Reverse mortgages are also best for those persons who have a strong emotional attachment to their home. She says those who don't have such an attachment might find it more advantageous to sell their house, downsize and invest their profits.
Williams' study was published in the latest edition of the journal of the Association for Financial Counseling and Planning Education.
Source: Flora Williams, (765) 494-8297; e-mail,
NOTE TO JOURNALISTS: A copy of the study "Value of Home Equity Used in Reverse Mortgages as a Potential Source of Income for Elderly Americans" is available from Beth Forbes at Purdue News Service, (765) 494-9723.