Here is Why Reverse Mortgages May Be on the Rise

A rise in withdrawals from retirement accounts might herald the potential for reverse lenders. As inflation strains budgets, Seniors are starting to contemplate reverse mortgages. People 62 and older can convert part of the equity in their homes into cash with a reverse mortgage.

According to research by investment firm Vanguard, more Americans are relying on their retirement savings to make ends meet in 2022, indicating that ongoing inflationary pressures are affecting retirement plans. The research suggests that Americans are struggling due to increasing costs of necessities such as food and fuel, which is inflicting more harm to their retirement savings, which were already severely impacted by inflation and the COVID-19 epidemic. This, in turn, exacerbates the problems that many American retirees will encounter.

According to October 2022 statistics compiled by Vanguard analysts, investors are more gloomy about the near-term prospects for financial markets, and a growing number of them are dipping into their retirement funds for cash. The Vanguard retirement research team’s review of withdrawal behavior from retirement plans indicates that more participants will tap their retirement assets for cash in 2022. Vanguard reports that notwithstanding the impact on retirement funds, the growth in hardship withdrawals is significant enough to merit a particular study.

Of most worry is the record-breaking increase in hardship withdrawals, the study reads. According to IRS regulations, they may only be used to meet an “immediate and heavy financial need” and are subject to income taxes and perhaps a 10% early withdrawal penalty.

Reverse mortgage instructor and author Dan Hultquist remarked that these concerns could be overcome if a retiree is open to accessing home equity via a reverse mortgage. As the baby boomer generation ages, they will be subject to mandated minimum distributions, said Hultquist. As a result, individuals are draining more money from their retirement accounts. In Atlanta last month, Longbridge CEO Chris Mayer stated that when individuals feel like they can draw more money, they spend more on items like pharmaceuticals. People typically fear taking too much money from other sources, as it is not sustainable. But once a new bucket is opened up with something like a reverse mortgage, it can serve as a solution.

Educators in the industry frequently classify the assets accessible to seniors into one of three “buckets.” The first is social security and/or pension benefits. The second category is retirement funds such as 401(k)s and IRAs. The third and least-used is home equity, Hultquist added.

“The third bucket is the least expensive,” he remarked. There is no tax impact, and although there are closing charges, the transaction does not depreciate the underlying asset. According to Mayer, if you withdraw from bucket number two in catastrophic circumstances, you may incur a tax penalty, and the asset’s value will decline.

The increase in the number of borrowers withdrawing from their retirement accounts may also indicate revived reverse mortgage product usefulness among needs-based borrowers, which the industry has sought to move away from in recent years by recruiting financial advisors, and referral partners, he added.