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Back Off From A Reverse Mortgage?

If you retire as early as age 62, you can choose to start receiving Social Security benefits to make up part of your retirement income. But the longer you wait to begin those payments, until age 70, the larger your monthly benefit will be. One strategy for filling that income gap in the meantime is to take a reverse mortgage on your home. That approach can be risky, however, and you may end up in worse financial shape than if you'd just opted to start receiving Social Security benefits as soon as you were eligible.

In a warning to older homeowners, the federal Consumer Financial Protection Bureau (CFPB) recently cautioned that the risks of reverse mortgages often outweigh the benefits.

A reverse mortgage is a special kind of loan available to homeowners who are at least 62 and who own their property outright. It "reverses" the terms of a regular mortgage, with your obligation to the lender growing as you receive regular income. The payout to you can be structured as a one-time lump sum or as monthly payments, or it can be a line of credit that you draw upon as needed. You stay in your home and your debt isn't repaid until you die or sell the house.

Because you won't repay the loan as long as you live in the home, there are no income requirements for the mortgage. The amount you receive depends on your age, the current value of your home, the area you live in, the loan term, and the interest rate. The older you are, and the greater the value of your home, the bigger the payout.

The earliest you can apply for Social Security benefits is at age 62, which may be why reverse mortgages have been touted as a way to replace the income you'll lose by waiting to begin receiving Social Security payments.

However, the CFPB warns that the costs of a reverse mortgage can exceed the lifetime benefit of waiting to claim Social Security. The average length of a reverse mortgage loan taken at age 62 is seven years. By age 69, borrowers who pursue this strategy will have incurred interest charges, insurance costs, and fees equal to approximately 60% of the amount they've borrowed. All of that money will eventually have to be repaid.

In a new report, the CFPB says that the overall costs of an average reverse mortgage loan are $2,300 more than a typical borrower can expect to gain by waiting to receive higher monthly Social Security benefits.

Reverse mortgages have other drawbacks as well. By reducing your equity in your home, such loans could limit your ability to address future financial needs. Homeowners who later wish to sell their homes may find that the loan balance has grown surprisingly large, leaving them with much less cash than they'd expected to buy another place or handle a financial shock. While a reverse mortgage may work in some cases, proceed with caution. We can meet with you to discuss your personal situation.