For some time, reverse mortgage lenders touted a strategy that involves obtaining a HECM early on in retirement in order to delay taking Social Security, therefore maximizing the benefits you can receive.
For every year that you can delay taking Social Security from 62 to 70, you can get as much as 8% more. For those who don’t have a lot of savings but do have a lot of equity in their house, tapping that equity to fund living expenses could help bridge the gap until they apply for Social Security at an older age.
Many HECM marketers promoted this strategy as a smart use of a reverse mortgage, and on the surface it made sense. Most Americans’ greatest source of income in retirement is Social Security, and they can maximize this benefit by using what may be their greatest resource – the equity in their homes – to achieve a better financial outcome.
But last year, the Consumer Financial Protection Bureau took issue with this strategy, releasing a statement warning consumers against using the product in this way.
The CFPB cautioned that the cost and risk of taking a reverse mortgage exceeded the benefit bump.
According the CFPB report, the expense of taking a reverse mortgage means that by age 69, the cost of the loan exceeds the cumulative lifetime benefits of a reverse by $2,300. It also asserted that withdrawing home equity could limit a senior’s options should they want to move or if they experienced a financial shock.
“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” former CFPB Director Richard Cordray said at the time. “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.
But some financial experts disagreed.
Jamie Hopkins, Co-Director of the American College’s New York Life Center for Retirement Income, called the CFPB report “limited in scope” and “riddled with inaccurate statements.”
In an article for Forbes, Hopkins said the…