CFPB warns against using reverse mortgages to delay Social Security payments

by Ryan Smith25 Aug 2017
The Consumer Financial Protection Bureau has issued a warning against taking out a reverse mortgage to bridge an income gap while delaying Social Security benefits.

According to the CFPB, the costs risks of taking out a reverse mortgage to delay Social Security benefits generally exceed the cumulative increase in lifetime benefits homeowners would receive by delaying their claim.

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

According to the CFPB, several mortgage companies have begun promoting the use of a reverse mortgage as a way to delay claiming Social Security benefits. In essence, homeowners who take this approach use a reverse mortgage to replace the income they would receive in Social Security benefits between age 62 – the minimum benefits age – and their full benefits age. When seniors delay claiming their Social Security benefits, they see a permanent increase in the monthly benefit.

But using a reverse mortgage to bridge the gap can be costly, according to the CFPB. The agency said that the strategy carried the following risks and costs:
  • Costs of a reverse mortgage can exceed the lifetime benefit of waiting to claim social security. The CFPB found that by age 69, the costs of a reverse mortgage loan are about $2,300 higher than the additional cumulative lifetime amount the average borrower could expect to gain from an increased Social Security benefit.
  • Decreased home equity would limit future financial options. Homeowners who want to sell their homes could be in trouble, as the loan balance is likely to grow faster than their homes appreciate.

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