Reverse mortgages are financial tools that allow homeowners to access capital using their home equity as collateral. They represent a way for people age 62 and older to tap into the value of their home, in contrast to other methods, such as a home equity loan or a home equity line of credit (HELOC). Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage. These loans, backed by the US Department of Housing and Urban Development (HUD), have become increasingly popular as a way for older homeowners with significant equity in their home to increase their income.
Consumer advocacy groups and the federal government have warned about scams and predatory lending connected to reverse mortgages, especially since these products are targeted to older people. In addition, researchers have reported racial gaps in access to and use of this financial tool. Given the rising racial wealth gap and the strong link between property ownership and wealth in the US, the issues around what part reverse mortgages play in shaping this situation and how they reflect other societal and structural differences are now beginning to be researched.
- Reverse mortgages have become a common financial tool that allows older homeowners to access capital by tapping their home equity.
- The popularity of the tool differs by race. According to the Urban Institute, the social policy think tank, reverse mortgages are most popular with White and Black homeowners. In contrast, Hispanic and Asian homeowners make up a larger share of “forward” home equity loans.
- People’s decision-making around reverse mortgages seems to be impacted by race.
- Researchers have said that reverse mortgages’ connection to race is understudied, but that they can replicate issues around social and economic opportunities.
Use of Reverse Mortgages by Race
A 2020 article from the Urban Institute, a Washington, DC — based social policy think tank, laid out the demographics of HECM borrowers, relying on data released as part of the Home Mortgage Disclosure Act, a law passed by Congress in 1975 to give consumers access to mortgage data.
Urban Institute researchers Karan Kaul, Laurie Goodman, and Sarah Strochak found that the popularity of reverse mortgages varies by race. Specifically, in 2018, White and Black homeowners made up a larger share of reverse-mortgage lending than of forward home-equity lending. Hispanic and Asian homeowners, in contrast, made up a larger share of forward home equity than reverse mortgages.
The researchers also pointed out that the number of reverse mortgages was surprisingly low. With older homeowners holding a large amount of housing wealth and anxious about finances, they noted that the decline in reverse mortgages from 2011 to 2018 was counterintuitive.
In 2018, according to the Urban Institute, White borrowers took out 77.7% of all reverse mortgages; Black borrowers took out 7.2%; Hispanic borrowers took out 5.8%; Asian borrowers took out 1.7%.
From 2018 to 2020, appreciating home prices and low home mortgage interest rates enticed more homeowners to unlock the equity in their homes, another Urban Institute report indicated. But nearly all of the increase in equity lending went to White homeowners. In contrast, equity loans to Black homeowners declined, threatening to intensify the racial wealth gap.
Reverse mortgages may be understudied, researchers say, but there’s reason to believe there’s a disparate racial impact.
In another review of data released by the Home Mortgage Disclosure Act, researchers affiliated with Howard University found “significant lending disparities” in the underwriting decisions on reverse mortgages related to race / ethnicity, as well as other factors, such as gender and age. The odds of being denied a loan were 107% and 48% higher, respectively, for Black and Hispanic homeowners than for White homeowners, according to the report.
Beyond the possibility of disparate denials, researchers posit that reverse mortgages further social inequalities, in part because the reasons for taking out a reverse mortgage vary from person to person.
A Yale research paper by Danya Keene found, for example, that the decision to take out a reverse mortgage can “reproduce” social inequalities. The underlying structural makeup of society influences individual decisions about whether to take out a reverse mortgage, the study indicated, bringing into play concerns about intergenerational wealth and structural hurdles.
For some, reverse mortgages are tools that can be useful to get as much as possible from your home equity, the report concluded. It quoted Cathy, a Black homeowner who’d been denied a traditional home equity loan, and who used a reverse mortgage to “enjoy her own equity.” For others, the report said, reverse mortgages are a last refuge, used to prevent losing their home. On this point, it cited Adanna, a Black widow who’d taken out a reverse mortgage to stave off foreclosure.
It is worth noting that, since reverse mortgages have to be paid off upon the death of the borrower, these loans have the potential to impact intergenerational wealth.
Are Reverse Mortgages Scams?
Some can be. The federal government has warned that reverse mortgage scams are relatively common. Equally concerning, though, are predatory loans that aren’t scams but that can be just as harmful to borrowers.
Are Reverse Mortgages Bad?
They’re a financial tool, which, like other financial tools, can be used well or badly. However, reverse mortgages are also prone to scams and predatory lending practices. You should be scrupulous — and seek out the best advice — when considering one.
Are Heirs Responsible for Reverse Mortgage Debt?
In order for an heir to inherit the home of a parent who had a reverse mortgage, they’ll have to pay off the debt. Reverse mortgages come due when the borrower dies, and the loan needs to be paid off before the house can be inherited. This is one reason why advocacy groups like CAARMA (Consumer Advocates Against Reverse Mortgage Abuse) warn about predatory reverse mortgage lending.
The Bottom Line
Reverse mortgages are one way for homeowners to access capital using their home equity. There are others, including a home equity line of credit (HELOC), cash-out refinance mortgages, and home equity loans. Given the rising number of older people in the US, this tool will likely remain relevant for some time. Since there are signs that race may impact the granting of these loans, the topic bears further investigation.