Delaying your Social Security benefit claim offers one of the best routes to higher retirement income — annual benefits increase 8 percent for every 12 months that you delay from age 62 to 70. But the strategy often comes with a challenge: how to meet living expenses while you wait?
How about this solution? Borrow against your house.
That is the pitch being thrown by some reverse mortgage marketers, who hope to attach their products to the substantial potential income benefits of delayed claiming at a time when their loan business is flagging.
The Social Security strategy is drawing sharp criticism from the federal Consumer Financial Protection Bureau, whose recently issued study of the strategy found that loan costs exceed the potential higher Social Security benefit.
The bureau also found that using a reverse loan to delay Social Security was likely to diminish the amount of home equity available to borrowers later in their lives, which can limit their options to move to new homes or handle a financial shock.
Reverse mortgages allow homeowners to borrow money against the value of their homes, receiving proceeds as a line of credit, fixed monthly payment or lump sum. The most popular type is the home equity conversion mortgage (HECM), administered by the Department of Housing and Urban Development (HUD).
The product has never really taken off. The industry is on track to originate roughly 55,000 HECMs this year, said John K. Lunde, president of Reverse Market Insight, which tracks industry statistics. That would be up a bit from last year, when just 48,700 new HECM loans were originated, but well off the peak year of 2008, when 115,000 new loans were issued.
Homeowners can qualify for the loans if they have sufficient equity in their property. Eligibility starts at age 62 — the same age that you become eligible to claim Social Security. The amounts you can borrow are determined by a formula that takes into account the percentage of the home's value based on the borrower's age and prevailing interest rates.