Retirement collapse as Baby Boomers using reverse mortgages for income

A reverse mortgage is a financial tool that allows seniors to use the equity in their home without any income or credit qualifications. In order to qualify for the program, seniors must be 62 years of age, live in their own home and have equity in it. Critics argue that up-front costs are high and make them expensive; seniors will pay large interest; and they’re confusing for the average elderly person to understand.

What’s the latest trend in today’s United States economy? According to a new study from Inside Mortgage Finance (via Reuters), an industry publication, Baby Boomers are turning back to reverse mortgages for income. Due to a paucity of savings and investments, retirees are borrowing against their home and will not have to pay that money back until they move or die.

Throughout last year, borrowers took out approximately $15.3 billion, which was a 20 percent increase from the previous year. In 2009, at the height of the housing collapse, a record $30.21 billion in reverse mortgages were completed.

The primary warning: it won’t stop. Industry experts say that 77 million retiring Baby Boomers will persist in participating in these loans in the next several years because of the difficult economy. The only positive is that some of the biggest lenders in the country today aren’t ecstatic about them, including Bank of America and Wells Fargo.

Even the U.S. Federal Housing Administration (FHA), which guarantees these loans, believes reverse mortgages are too hazardous. Last year, the FHA doled out $1.7 billion in taxpayer money in bailouts. The FHA, though, has not revised any of its rules in its reverse mortgage program, which could spell doom for taxpayers.

“The FHA is at risk from these loans, and the taxpayers are at risk too,” said James Bothwell, a consultant and former chief operating officer of the Federal Home Loan Bank system.

Other Mistakes

The economy has left numerous seniors and retirees in complete financial collapse. A collapse in the housing market, the bursting of bubbles, record-low interest rates and immense debt loads, Baby Boomers are barely keeping their heads above water, which is leading to other financial mistakes that can lead to long-term consequences.

The Wall Street Journal listed five other financial mistakes that retirees make:

–          Big purchases

–          No cushion

–          Omitting common sense

–          Seeking out a yield

–          Allowing emotions to reign supreme

Personal financial situations are so bad that more older workers are delaying their retirement plans in order to work more. According to an Associated Press-NORC Center for Public Affairs Research survey discovered that 82 percent of workers aged 50 or older say it’s likely they will work for pay during their retirement. In addition, 47 percent say they are retiring later than they previously estimated to play catch-up.

“Many people had experienced a big downward movement in their 401k plans, so they’re trying to make up for that period of time when they lost money,” said Olivia Mitchell, a retirement expert who teaches at the University of Pennsylvania.

It’s never too late to save for retirement, even if you’re in your 40s or 50s. These are five simple tips that most financial experts will recommend:

–          Create a budget and a plan

–          Contribute regularly, play catch-up

–          Look at your sources of retirement funds

–          Downsize your lifestyle and cut down your debt

–          Consider attaining a part-time job

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