Reverse mortgages are financial instruments that let homeowners access financing using the equity in their homes as security. As opposed to other options like a home equity loan or a home equity line of credit, they provide persons age 62 and over a means to access the value of their house (HELOC).
The most popular kind of reverse mortgages are home equity conversion mortgages (HECMs). The U.S. Department of Housing and Urban Development (HUD) backs these loans, which are becoming more and more well-liked as a means for senior homeowners to enhance their income.
Concerning reverse mortgage frauds and predatory lending, particularly given that these products are geared toward older consumers, consumer advocacy organizations and the federal government have issued warnings. Researchers have also shown racial disparities in this financial tool’s availability and usage. Reverse mortgages’ role in creating this scenario and how they reflect other cultural and structural inequalities are starting to be investigated in light of the widening wealth gap between races in the US and the significant correlation between wealth and home ownership.
- Reverse mortgages are a popular financial technique that enables senior citizens to access funds by using the equity in their homes.
- By race, the tool has different levels of popularity. The Urban Institute, a social policy think organization, reports that White and Black homeowners use reverse mortgages the most often. In contrast, a greater proportion of “forward” home equity loans go to Asian and Hispanic homeowners.
- The decisions people make about reverse mortgages seem to be influenced by their race.
- However, they may mimic problems with social and economic prospects, according to researchers who claim that the relationship between reverse mortgages and race is understudied.
Use of Reverse Mortgages by Race
The demographics of HECM borrowers were outlined in a 2020 article from the Urban Institute, a Washington, D.C.-based social policy think tank, using information made available under the 1975 Home Mortgage Disclosure Act, a statute implemented by Congress to provide consumers with access to mortgage data.
Reverse mortgage acceptance rates differ by race, according to research by Laurie Goldman, Sarah Strochak, and Karan Kaul for the Urban Institute. In particular, reverse mortgage lending in 2018 was more prevalent among White and Black homeowners than forward home equity lending. In contrast, a greater proportion of forward home equity loans went to Hispanic and Asian homeowners than to those who had reverse mortgages.
The researchers also noted the unexpectedly low amount of reverse mortgages. They stated that the reduction in reverse mortgages from 2011 to 2018 was surprising given that older homeowners possess a significant amount of housing wealth and are concerned about their finances.
The Urban Institute reports that in 2018, White borrowers obtained 77.7% of all reverse mortgages, followed by Black borrowers with 7.2%, Hispanic borrowers with 5.8%, and Asian borrowers with 1.7%.
Another Urban Institute analysis found that from 2018 to 2020, rising property prices and low mortgage interest rates encouraged more homeowners to access the equity in their properties. But White homeowners received almost all of the increase in equity financing. Contrarily, equity loans to Black homeowners fell down, raising the possibility of a widening racial wealth divide.
Although reverse mortgages aren’t well understood, there is evidence that racial disparities exist in their effects.
Researchers from Howard University discovered “substantial lending inequalities” in the underwriting choices made for reverse mortgages based on race and ethnicity, as well as other variables including gender and age, in another analysis of data from the Home Mortgage Disclosure Act. The survey found that compared to White homeowners, Black and Hispanic homeowners had probabilities of loan denial that were 107% and 48% greater, respectively.
In addition to the potential for divergent rejections, experts contend that reverse mortgages exacerbate socioeconomic disparities, in part because each borrower’s motivations for getting a reverse mortgage are unique.
For instance, a study from Yale University indicated that taking out a reverse mortgage might “reproduce” socioeconomic inequities. The study was conducted by Danya E. Keene, Ann Sarnak, and Caitlyn Coyle. According to the research, the fundamental structural nature of society has an impact on individual choices about whether to get a reverse mortgage, raising issues related to intergenerational wealth and structural barriers.
According to the report’s findings, reverse mortgages are a tool that some people may find beneficial for maximizing their home equity. It cited Cathy, a Black homeowner who utilized a reverse mortgage to “enjoy her own equity” after being turned down for a regular home equity loan. Reverse mortgages, according to the research, are a last resort for some people who utilize them to keep their homes. Adanna, a Black widow who had obtained a reverse mortgage in order to avoid foreclosure, was mentioned in support of this claim.
Reverse mortgages have the potential to have an influence on intergenerational wealth since they must be repaid following the borrower’s death.
Are reverse mortgages scams?
Some people are. The federal government has issued a warning that reverse mortgage fraud is a very typical occurrence. Predatory loans that aren’t frauds but may nevertheless hurt borrowers are as worrying, however.
Are reverse mortgages bad?
They are a kind of financial instrument that, like all others, may be employed effectively or destructively. However, unscrupulous lending practices and frauds are also common with reverse mortgages. When thinking about one, you should be meticulous and seek out the greatest guidance.
Are heirs responsible for reverse mortgage debt?
An heir who has a reverse mortgage will need to settle the debt before they may inherit their parent’s property. When the borrower passes away, the reverse mortgage becomes due, and it must be repaid before the home may be inherited. This is one of the reasons why anti-predatory reverse mortgage lending organizations like CAARMA (Consumer Advocates Against Reverse Mortgage Abuse) provide warnings.
The Bottom Line
One option for homeowners to acquire funds utilizing their home equity is via reverse mortgages. Others include HELOCs, home equity loans, and cash-out refinances. This technology will probably continue to be useful for a while given the growing elderly population in the United States. Further research on this subject is necessary since there are indications that race may affect how these loans are granted.
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