Older Americans are sitting on more than $12 trillion in home equity, according to the National Reverse Mortgage Lenders Association. These homeowners are seeking different retirement solutions to help allocate their home equity and make it more durable over the next 20 to 30 years.
According to data from Statista, there were roughly 5.95 million homes bought and sold in the U.S. last year. The National Association of Realtors (NAR) estimates that baby boomers made up roughly 39%, or 2.32 million, of those homes.
If we then look at data from the Federal Housing Administration (FHA), there were 2,063 Home Equity Conversion Mortgage (HECM) for Purchase loans endorsed in 2022 — less than 1/10th of 1% of homes sold last year.
Today’s market includes mortgage rates of above 6%, low inventory and elevated home prices, all contributing to affordability problems. Many of the baby boomers that have a mortgage on their current home likely refinanced during the pandemic to get a very low interest rate.
With all of this in mind, why would baby boomers move into a new home, where their expenses would be exponentially higher due to higher mortgage rates, increased inflation and current economic concerns?
Many of these homeowners may need to find a home that is more suitable for their current lifestyle, or would like to be closer to their children and grandchildren. They may want to have more money at their disposal in case of emergencies or because of medical expenses. Lastly, they want to create better household cash flow, which can be achieved through a reverse mortgage.
Why is this market underserved?
There are a few key reasons. First, most real estate agents and potential customers have no idea that this financing option exists to purchase homes. And if an agent does they don’t bother to discuss it if their client is willing to pay ‘all cash’ or has qualified for conventional financing. They default to the path of least resistance and just get the sale done, rather than being an advocate for their client and share all the options.
At the same time not all loan officers have made it a part of their business
When the baby boomers realize that a reverse mortgage can be a fantastic benefit to their lifestyle in retirement it will become a more used tool to purchase homes.
The HECM for Purchase product
Why would a buyer want to use a reverse mortgage? Because the mortgage payments are optional. Yes, you are not required to make a payment. Instead of making a payment, the interest equivalent is added to the mortgage balance. While that may sound like a bad thing, in reality, the money that you would have been required to pay on a conventional mortgage stays in your bank account. So it is kind of a wash.
The other big difference is that the required down payment ranges from 55%-65%.
Benefits of the Reverse Mortgage
The Reverse Mortgage for Purchase allows the buyer to feel more financially secure in making that purchase — they can get the home they want, where they want it, with more control over their financial situation. They’re able to keep a significant amount of their proceeds from their departure home with the flexibility to make monthly mortgage payments or not, provided they comply with the loan terms, including tax, insurance and maintenance costs.
I look forward to the opportunity to share and discuss the reverse mortgage pros and cons with seniors to give them the opportunity to know all their choices and can live their best life in retirement!
