Using a reverse mortgage to delay Social Security: does that really make sense?

Delaying your Social Security benefit claim offers one of the best routes to higher retirement income – annual benefits increase 8 percent for every 12 months that you delay from age 62 to 70. But the strategy often comes with a challenge: how to meet living expenses while you wait?

How about this solution? Borrow against your house.

That’s the pitch being thrown by some reverse mortgage marketers, who hope to attach their products to the substantial potential income benefits of delayed claiming at a time when their loan business is flagging.

The Social Security strategy is drawing sharp criticism from the federal Consumer Financial Protection Bureau (CFPB), whose recently issued study of the strategy found that loan costs exceed the potential higher Social Security benefit.

The CFPB also found that using a reverse loan to delay Social Security was likely to diminish the amount of home equity available to borrowers later in their lives, which can limit their options to move to new homes or handle a financial shock.

Reverse mortgages allow homeowners to borrow money against the value of their homes, receiving proceeds as a line of credit, fixed monthly payment or lump sum. The most popular loan type is the home equity conversion mortgage (HECM), which is administered, regulated and insured by the U.S. Department of Housing and Urban Development (HUD).

Homeowners can qualify for the loans if they have sufficient equity in their property. Eligibility starts at age 62 – the same age that you become eligible to claim Social Security. The amounts you can borrow are determined by a formula that takes into account the percentage of the home’s value based on the borrower’s age and prevailing interest rates.

HECM borrowers do not have to pay back their loans until they move out of their homes or die. But defaults are possible because the loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their homes.

My Reuters Money column this week examines the combined HECM-Social Security strategy. My conclusion: on paper, it could work for some households. But it is a very complex strategy with lots of risk. As the saying goes – don’t try this at home without alot of expert help.

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