Reverse mortgages have an image problem

Mar 29, 2017 @ 2:32 pm

By Mary Beth Franklin

A rose by any other name may smell just as sweet, but when it comes to a home equity loan, one that is labeled "reverse mortgage" just plain stinks.

That's the conclusion of new research released Wednesday by the National Council on Aging (NCOA), a nonprofit advocacy group supporting older adults. Like it or not, finding ways to unlock home equity may hold the key to retirement security for many aging baby boomers.

The research was designed to gauge the interest and understanding of home equity products by both older homeowners and financial advisers. It included comprehensive surveys of more than 250 financial advisers and more than 1,000 older homeowners ages 60-75, plus focus groups with 112 consumers. It turns out that both consumers and advisers are equally uninformed about the nuances of the various ways to tap home equity.

More than 90% of older consumers worry about rising medical costs in retirement and more than 80% worry about outliving their retirement savings, according to the research. Yet when considering financial preparedness, consumers focused primarily on accumulated assets such as 401(k) accounts, pensions, annuities and savings. Even though their homes can represent as much as 80% of their net worth, older people generally overlooked or were unwilling to consider home equity as a retirement asset.

The research also revealed that both consumers and financial advisers do not have a full understanding of two common home equity products—a home equity line of credit and a reverse mortgage line of credit. Survey participants were presented with descriptions of both types of loans and were asked which one best met their retirement needs.

Participants were told that loan A allows a borrower to access a line of credit for 10 years, requires minimum monthly payments and the loan balance must be repaid in full even if the borrower owes more than the house is worth. Loan B has no mandatory 10-year draw period, requires no minimum payments and the borrowers or heirs never pay back more than the home's fair market value when sold.

When the products were described, but not named, 58% of consumers and 43% of financial advisers said they preferred Loan B, which is a reverse mortgage. But when both products were named, 68% of consumers and 37% of financial advisers flip flopped and said they preferred a home equity line of credit.

"Older homeowners and financial advisers have a strong negative bias against the reverse mortgage line of credit based exclusively on product name and driven by preconceived notions and misunderstanding of the product," the NCOA study found. (Full disclosure: I am a paid consultant to NCOA).

"When it comes to retirement, it is not a question of (whether) older adult homeowners will access home equity, it's a matter of when, and more importantly, how," said Craig Corn, chief executive office of Reverse Mortgage Funding, which funded the research through a grant to the NCOA.

"Optimizing the value of the home is central—not peripheral—to the decumulation phase," added Jay Greenberg, Chief Executive Officer of NCOA Services LLC, a subsidiary of the NCOA.

Typically, a home equity line of credit, commonly called a HELOC, has a 10-year interest-only feature, but it begins to amortize after that. "Think of what might happen to a 65-year old who takes out a HELOC and 10 years from now their monthly payment goes from $300 per month to $700 per month when they can least afford it," said Mr. Corn. "With a reverse mortgage, the borrower can decide whether to make a payment or not." The reverse mortgage must be repaid when the homeowner leaves the house permanently or dies.

Mr. Greenberg said NCOA plans to dig deeper into the research to try to determine if financial advisers are uniformly opposed to reverse mortgages or whether they are influenced by the type of firm or compensation model. From the consumer perspective, bankers have a leg up on the competition when it comes to trusted sources on home equity issues, he said.

And look for a new phrase to add to your financial lexicon: home equity release product. While it may not roll off the tongue, it doesn't carry the negative connotation of "reverse mortgage".


What do you think?

View comments

Upcoming event

Oct 22


San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print