In the reverse mortgage industry, it isn’t too far of a stretch to attribute a lack of awareness and understanding to the miniscule penetration rate of eligible American homeowners who can benefit from a Home Equity Conversion Mortgage, but don’t because they either know little about the product or they are guided by misinformed perceptions.
Consumer ignorance traps reverse mortgages within a vicious circle, where a lack of knowledge often feeds into common misperceptions of the loan product and, ultimately, hinders the willingness to learn more about the true functions of HECMs.
The truth is the vast majority of older adults don’t know a lot about home equity use in retirement, let alone HECMs, according to the results of a recent survey that gauged the knowledge levels of those nearing or in retirement with regards to reverse mortgages.
Of a total of 1,003 people between ages 55-75, roughly 70% failed a retirement income literacy quiz on reverse mortgages administered by The American College, along with help from Greenwald & Associates.
For this survey, The American College garnered responses from 537 males and 466 females who had at least $100,000 in investable assets and $100,000 in home equity. Their knowledge was tested through a quiz comprised of 10 true/false questions relating to reverse mortgages. The quiz questions were created by College professors and reviewed by industry experts to ensure accuracy.
Only 30% of survey respondents were able to score a 70% on the quiz—the minimum passing score. Meanwhile, roughly 40% of respondents answered 4-6 quiz questions correctly, while 30% answered correctly for three or less questions.
The average score amongst survey respondents was 4.8 out of 10 questions, with men scoring 5.4 and women 4.1.
“The survey responses show that many people moving into retirement with some home equity do not fully understand reverse mortgages, including those individuals that have reviewed reverse mortgages as a potential income source,” remarked Jamie Hopkins, professor of taxation at The American College, and one of the survey’s lead researchers.
Respondents varied in terms of their retirement preparedness, housing wealth, as well as age and sex. Among the total number of participants, 44% had a comprehensive written retirement plan in place, whereas 60% had a financial adviser. As for housing wealth, 19% reported having home equity of $500,000 or more, while 30% had between $100,000-$200,000 in home equity.
Less than a third of survey respondents answered correctly to two of the most common reverse mortgage misconceptions outlined in the quiz, respectively.
About 27% of adults understood that using a reverse mortgage early in retirement to support a retirement plan is better than as a last resort towards the end of retirement; whereas just 25% understood that heirs do not have to repay the reverse mortgage loan balance “above and beyond” the home’s value.
On a more widespread basis, 71% of respondents knew that a lump sum wasn’t the only form of payment option for a reverse mortgage; and 69% knew that they could enter into a reverse mortgage before their home was fully paid off.
Among the more than 1,000 adults ages 55-75 that were surveyed, Hopkins noted that only a single person had engaged in a reverse mortgage, acknowledging that the age range of adults surveyed limited the sample for potential age-qualified reverse mortgage borrowers who might be 62 or older.
Although retirement income planning is “extraordinarily” challenging, Hopkins noted, requiring financial advisers to manage a variety of client risks, legal changes and ethical issues when developing a financial plan, a reverse mortgage can be one effective piece of the planning puzzle.
“While a reverse mortgage is not the right solution for every retiree, it can be a helpful retirement income tool,” Hopkins said. “Reverse mortgages really are safer and more suitable products now than they have ever been in the past.”
Not only can a reverse mortgage diversify home equity, transforming this otherwise illiquid asset into an extra source of funding, but reverse mortgages can also help retirees build in a non-market correlated source of income to help offset market and sequence of returns risk.
“Financial advisers and retirees need to at least consider home equity as part of a retirement income plan and consumers need to better understand the features and uses of reverse mortgages,” Hopkins said.