Why Reverse Mortgages May Not Boost Retirement Income

When they first came on the market a decade or so ago, reverse mortgages were heralded as new sources of income for cash-poor, home-rich retirees. The were seen as new sources of generating money for retirement.

After all, you could tap the equity in your home for income -- and not have a monthly mortgage payment. But combining reverse mortgages with delaying Social Security may not be a good choice.

According to a study by the Consumer Financial Protection Bureau (CFPB), this one-two punch retirement strategy is highly flawed. The agency recently issued a warning about this option:

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said former CFPB Director Richard Cordray in the report.

“For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

The CFPB study highlighted several problems, including:

-- Reverse Mortgages are Costly. The expenses of a reverse mortgage can "exceed the lifetime benefit of waiting to claim Social Security: The average length of a reverse mortgage loan borrowed at age 62 is seven years," the CFPB reports.

"By age 69, borrowers that pursue this strategy will pay approximately 60 percent in costs (interest, insurance, and fees) for the amount borrowed to bridge the gap in income while delaying Social Security benefits until a later age.

Because reverse mortgages are an expensive way to delay Social Security, the report found that by age 69, the costs of a reverse mortgage loan are $2,300 higher than the additional cumulative lifetime amount the typical borrower will expect to gain from an increased Social Security benefit."

-- Diminished Home Equity May Sting Down the Road. "Decreased home equity limits options to handle future financial needs: A reverse mortgage reduces the equity homeowners have in their house.

Homeowners who wish to sell their homes after taking out a reverse mortgage are particularly at risk because the loan balance is likely to grow faster than their home values will appreciate. This could limit options for moving or handling a financial shock.

For example, a 62-year-old homeowner who has a home worth $175,000, with a 2 percent appreciation per year, will have 61 percent of the home’s total value available as equity at age 67. By age 85, this homeowner will have only about 16 percent of equity in the home if they sell the house."

Taking out a reverse mortgage involves careful consideration. You should definitely consult with a fee-only financial adviser or certified public accountant before you do it.

Although every loan requires counseling, you will need to know how a reverse mortgage will work in the context of your overall retirement plan. You may not even need one.

Also check out the CFPB's free video on the subject.

Why Reverse Mortgages May Not Boost Retirement Income curated from Forbes - Real Estate