DOES IT MAKE SENSE TO TAKE A REVERSE MORTGAGE TO DELAY COLLECTING SOCIAL SECURITY?

By Thomas D. Begley, Jr., Esquire, CELA

In August, the Consumer Financial Protection Bureau (CFPB) published an issue brief titled “Issue Brief: The Costs and Risk of Using a Reverse Mortgage to Delay Collecting Social Security.” Many financial advisors recommend that consumers increase their monthly benefits by delaying the date on which they claim Social Security. Individuals can claim Social Security upon attaining the age of 62, but the monthly payment is discounted. For most people, normal retirement age is between 66 and 67, depending on their birthdate. By waiting from 62 until the normal retirement date, the monthly Social Security payment is increased. However, by waiting until age 70, the monthly Social Security payment is increased even further. In order to make up for the lost income for the period of time between age 62 and normal retirement date or even 70, a reverse mortgage could be obtained.

The CFPB examined different scenarios and found that, generally, the costs associated with obtaining a reverse mortgage exceed the additional income that will be obtained from an increase in Social Security payments.

The CFPB study showed that consumers who live beyond the average life expectancy of a 62 year old, which is approximately 85 years of age, receive more money from the increased monthly benefit than consumers who claim earlier and receive lower monthly payments for a longer period. The example given by the CFPB is a 62 year old woman who lives to age 85. This woman would receive $29,640 more in cumulative benefits during her lifetime if she claims the monthly benefit of $1,300 per month at age 67 rather than claiming a monthly benefit of $910 per month at age 62.

A strategy would be to forego Social Security payments and borrow on a reverse mortgage to make up the income shortfall. The problem is that the costs associated with the reverse mortgage are very high. The cost would vary depending on when the loan was paid off. The average term of a home equity loan is approximately seven years. If the borrower takes out the loan at age 62 and pays it off at age 69, the reverse mortgage loan costs will be $31,900 while the additional payment from Social Security, if the borrower lived to age 85, would only be $29,640. If the borrower does not pay the loan off until age 85, which is the approximate life expectancy of a 62 year old, the situation is even worse. The reverse mortgage loan costs would be $178,000. This is approximately $149,000 more than the lifetime amount of money gained from an increased Social Security benefit, if the consumer lives to age 85. The increased Social Security benefit would be $29,640.

An additional problem would be if the borrower had to sell his or her home in order to move or deal with some financial shock, there would be much less equity in the home at that point in time.

In conclusion, borrowing on a reverse mortgage to obtain an increased Social Security benefit probably does not make good financial sense for most people.