Many senior citizens are taking out reverse mortgages. Image from Flickr.

A relatively new mortgage product, known as a “reverse mortgage” is gaining popularity. Reverse mortgages are usually targeted to senior citizens. These mortgage products essentially allow a homeowner to get fast cash out of their home, while still living in it for a period of time. Consumer advocates, though, are warning that reverse mortgages may be putting senior citizens into difficult situations.

The basics of reverse mortgage

A reverse mortgage, at its base, is a way for seniors to use the equity they have built up in their home. The bank or reverse-mortgage financier gives the senior a lump sum or several smaller payments in all advance cash. Over time, the debt on the house increases. Once the senior no longer lives in the house, the loan comes due — usually paid by selling the house.

The cost of reverse mortgage

The cost of a reverse mortgage is usually paid in a few different ways. First, the origination and loan fees can often add up to 30 percent or more of the value of the loan. Second, the lien that is placed on the house is usually for much more than the loan amount. For example, one reverse mortgage of $80,000 in cash today required an additional $25,000 in fees. A lien was then placed on the property for $470,000. That full sum must be paid when the senior moves out or dies.

Hidden requirements of reverse mortgages

Many times, individuals who get reverse mortgages end up getting lost in some of the fine print. Most reverse mortgages require that a home be maintained in “selling condition” from the time the fast loan is taken out until the home is returned to the bank. The interest on reverse mortgages is usually also calculated as compounding. In other words, incredibly difficult to pay back.

Upcoming reverse mortgage bust

Some consumer advocates have taken a long look at reverse mortgages, and the conclusions are not promising. The National Consumer Law Center pointed out that reverse mortgages are “eerily similar” to the subprime mortgages that headed up the financial downturn. With more than 100,000 reverse-mortgage homes set to go on the market in the next 10 years, home prices will likely stay extremely low. Reverse mortgages can be incredibly useful for seniors with no other options — but for most, it’s a step in the wrong direction.

Changing model of retirees

Borrowing money, using savings and family’s financial aid may be necessary for senior citizens moving into retirement homes. Gone are the days of retiring in the comfort of a luxury facility overlooking golf courses and close to shopping malls. In today’s post-recessionary economy, nursing home operators and states are rethinking their decisions. According to home builder Del Webb a new survey is showing that Arizona, Florida, South and North Carolina are where aging baby boomers will be heading.

A new study on retirement

In the past, moving to a warm climate was the priority for those looking to retire but now the concern is primarily financial. The number one fear for seniors is maintaining their cost of living and that is opening the door for more states to attract the retired public. The Del Webb study showed that about 35% plan to move to a new home when they retire and about half plan to relocate to a different state. Samuel Ford, economist for Economy.com, said, “People going into retirement now, or in coming years, have gone through the worst recession since the 40s. Their nest eggs and retirement funds are tapped out or stretched at minimum, and that is causing them to rethink their retirement plan as a whole.”

What retirees want now

For consumers who want to relocate, there are also specific needs. According to a survey conducted by the National Association of Home Builders, those who are fifty-five years and older want the following in a home:

• Maximum storage space
• In-unit washer and dryers
• Easy-open windows
• Garage door openers
• Porches and private patios
• Large bathrooms
• Attached garages

In lieu of these things, they are giving up island work areas, wood burning fireplaces, exercise rooms and separate showers. Hi-tech additions are also no longer a priority. Rose Quint, the NAHB VP for study research, (see http://www.nj.com/business/index.ssf/2010/01/seniors_rethink_their_dream_ho.html) said, “The older buyers are frugal, probably on a fixed income and so expensive tech items are not that big on their lists…Retiring consumers don’t want to rely on borrowing money from families or personal loans to make their monthly budgets. The stress to them isn’t worth it.”

More care included in the home purchase

Another interesting result of the survey is that retiring homeowners want services added to their purchase. John Migliaccio, director of research at MetLife’s Mature Market Institute, said, “Very telling is that the younger group of mature consumers reported enthusiastically that they want services like home maintenance and repair as part of their next home purchase, along with services usually connected to older householders like housekeeping, onsite health care and transportation.” The group also wanted a larger variety of activities and social interaction built into their retirement communities.

Retirement in the future

Overall retirement is changing due to the economic recession. Though it is over, it has left millions of Americans with depleted savings and now they are looking for more cost-efficient areas and situations to retire in. Rather than borrowing money and relying on family help, the baby boomers are opting for cutbacks in retirement. It is telling of how the economy changed public perception and how as a whole society is remembering well the financial difficulties of the market.

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Senior citizens needing money now are worried that Social Security benefits won’t be around for much longer. Studies show that Social Security benefits make up for about 40% of retirees’ income. It’s no secret that many Americans have come to rely on the benefits to pay their monthly bills. Without it, they would be hard-pressed to maintain their current quality of life.

Government experts are saying that the Social Security fund will be tapped out in coming years. They have noted that tax receipts will start to fall short of outlays by 2016 and the long-term surplus of the fund will be drained by 2037. This has been much cause for concern with baby boomers who are quickly approaching the age of retirement and worried about money.

Is the Social Security fund gone?

Though the government admits that the Social Security fund will reach lows in coming years, they insist that benefits will not be eliminated. In fact, the fund will still be able to deliver about 75% of scheduled benefits. In addition, the gap between viable payouts and full payouts isn’t huge. It’s only about 2% of the national wages. That could easily be funded by small tax increases or a reduction in benefits for retirees.

How are benefits calculated?

Many Americans are concerned about the fund and wondering if they should include Social Security benefits in their retirement budget plan, and if so, how much. The answer begins with looking at how the payout is calculated. It’s an algorithm of how long a person worked, adjusting their annual earnings for inflation, averaging the highest 35 paid years of service and then replacing a portion of their average income with monthly payouts. The next factor is the timing. People can claim their full benefits between 65 to 67, or continue to work until they are 70 for maximum benefits.

Studies have shown that in today’s market people normally collect money as soon as they can. In fact, half of all men claim their Social Security benefits by the age of 63. There are some strategies though that can be used to sustain money now that the economy is strained. First, if a spouse retires, the other spouse can claim spousal benefits but continue to work. They can switch to their own benefits when they retire. This is a good strategy because it allows consumers to build up more credits.

Second, when a worker reaches their full retirement age they can claim benefits, but suspend their payments until a later time. That way the value of future payments continues to grow. If the other spouse claims benefits immediately, that allows the other to grow steadily. Both strategies are good ones to have to maximize the payouts consumers are entitled to.

Managing Social Security

Managing Social Security is still an issue for retirement age Americans. Though funds are depleting, the government has tools to build up the Social Security fund. Retirees who need money now have options. It may take some strategizing, but with careful planning they can maximize their benefits.

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Colleges are struggling to find fast cash these days and surprisingly, it’s coming to them via an odd client base. It seems that senior citizens are courting colleges looking for non-credited classes. That works well for colleges because they can charge anywhere between $25 to $500 per class and it adds nothing to the overhead. It’s a simple way of bringing in more revenue and in today’s market, that’s a huge advantage.

The changing face of college students

More senior citizens are going back to school these days and schools are responding. There are state and national programs specifically geared toward creating affordable education for retirees. For example, Ohio State University has a program called “Program 60″ that allows those who are 60-years of age or older to attend classes for free. Many other colleges are doing the same thing by building senior-centric courses. Here are some colleges that offer outstanding senior programs.

Yale University

Yale University in New Haven, Connecticut caters to its alumni. The college allows all graduates and their families to audit undergraduate classes as long as they have instructor approval. The cost for the classes is about $475. The school is committed to offering auditing as a benefit to its alumni and works to build a well-rounded roster of classes available to audit.

Cornell University

Cornell University is in Ithaca, New York. The school offers an open-door policy to retirees who can sit in on most of the courses, whether graduate or undergraduate. The cost for each is $101 per credit hour. The classes range from politics and painting to tennis and ethics. The vast selection of classes makes it possible for seniors to experience a wide variety of extracurricular activities. It’s a great way for them to continue learning well after they graduate.

University of Pennsylvania

The University of Pennsylvania is located in Philadelphia. It offers senior auditing programs for people over 65-years of age. They are allowed to sit in on all undergraduate courses for $500 per hour. The senior auditing program is a great way for the university to earn fast cash and still stay focused on their goal of education. Retirees can participate in up to two classes per semester and aren’t limited by any one field of study.

Princeton University

Princeton University in Princeton, New Jersey is another school that welcomes retirees to sit in on their undergraduate courses. This school offers a wide variety of classes—over 200 per semester—and seniors are allowed to sit in most of them through a community auditing program. The school offers the classes at a cost of $125 per course. The popularity of the courses has proven itself throughout the past few years because enrollment is up considerably and seniors from the neighboring areas are filling the classrooms.

University of Denver

The University of Denver is another school that is offering programs for retirees. It has a senior citizen audit program that is open to anyone over 60-years of age. The classes here are available based on a class-size stipulation, but as long as there is room, seniors are welcome. The cost is just $25 per course and that makes it one of the most cost-effective schools in the nation.

College and the older student

Many colleges throughout the nation are finding out how lucrative their senior audit programs are. They are earning fast cash through the programs by offering reasonably priced courses to senior citizens. Because of their popularity, the classes will continue to grow, and with a senior population that is looking to continue learning, they won’t be empty any time soon.

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