Baby boomers tapping into home equity at earlier ages

Reverse mortgages have been around for a long time and have traditionally been seen as a last resort, an influx of cash for elderly people worried that their retirement savings will not last. But the recession and recovery has seen people tapping their homes for money at much younger ages.

A reverse mortgage works like this: A lender gives a borrower a lump sum or monthly cash payout equal to a percentage of the equity in the home. The borrower pays taxes and insurance, maintains the home and can live there as long as they want. The loan is paid back when they die or the home is sold.

The ads are all over TV with pitchmen familiar to baby boomers, including Henry Winkler, aka The Fonz, from “Happy Days,” touting the advantages of a reverse mortgage. But there are risks.

“It could be that when you see Henry Winkler or you see whoever on TV, you’re only hearing the good part, but if you’re getting into this, it’s a really big deal,” said Erin Reardon. She’s a counselor with the Seattle community action organization Solid Ground.

When people apply for a reverse mortgage, the law requires counseling and Solid Ground is a federally approved counseling organization.

“The biggest risk, I think, is the loss of equity,” said Reardon. Another concern is expense. Securing a reverse mortgage can cost a homeowner thousands of dollars in fees, closing costs and mortgage insurance. Generally speaking, money acquired through a reverse mortgage is not taxable and does not impact federal benefits, such as Social Security.

Before the housing bubble burst, reverse mortgages were hot, no longer just a last resort.

“We couldn’t even keep up with the demand for counseling. At that point, people were getting it because they wanted to supplement their income, things were going OK but they might have wanted extra money or they wanted to have money to go on a trip or something like that but now it seems like it’s become more of a necessity,” said Reardon.

A reverse mortgage could mean the kids won’t get the house when mom and dad die.

“I’ve had a couple of cases where the children were very upset about the concept of a reverse mortgage but for the most part, their children are in support of it because they want their parents to be able to have access to the funds, to be able to survive and to pay their bills and maybe they also don’t want their parents living with them,” said Reardon with a laugh.

Another consequence of the housing crisis is that applications for reverse mortgages are down because fewer homeowners qualify, having lost value in their properties. There are also fewer reverse mortgage lenders out there willing to deal with stricter rules for calling loans and the risk of being saddled with more foreclosed properties or the perception that they’re trying to “rip off seniors,” according to real estate expert Tom Kelly.

Traditionally, most reverse mortgages have been taken out by people in their 70s but experts say more and more people in the 60s are taking advantage of whatever equity they have in their homes.