A simple question, right? All reverse mortgage products require that the youngest homeowner (you or your spouse) be 62 years old at the time of closing. The age of the youngest homeowner is the key – either they’re 62 or they’re not.

But the age question has another side to it too.

See, age is used not only to assess whether basic program qualifications are met; age also has an even more significant role in determining how much can be borrowed. In simplest terms, the older you are, the more you can borrow.

In other words, all other factors (such as location, value of home, etc.) being equal, an 80-year old homeowner will be able to obtain a much larger reverse mortgage – perhaps 30% larger - than a 62-year old homeowner.

Why?

Because reverse mortgages are not fixed-rate, fixed-term loans. Rather they are based on life expectancy. At any point in time, odds are that the 62-year old will live more years than the 80-year old. From the lenders standpoint, this mean they likely will be making payments to the 62-year old for a much longer period than the 80-year old.

On average the older borrower will have a shorter remaining life expectancy than the younger one. To equalize expected payments over the life of the loan, the amount available for the younger borrower is set at a lower level than an older borrower. In other words, compared with younger borrowers with exactly the same levels of interest rate and home value, an older borrower will get a higher amount of monthly payments or line of credit disbursements.

This runs counter to many of life’s financial transactions where the younger person always seems to get the advantage. A $100,000 term life insurance policy will cost far less for a 25-year old than for a 50-year old. But in the unconventional world of reverse mortgages, the opposite is true.

Does this mean that a 95-year old homeowner is the ideal candidate for a reverse mortgage?

Not necessarily. Even though the 95-year old can get a much larger loan than, say, a 62-year old, his expected lifespan is too short to efficiently amortize the high costs associated with taking out a reverse mortgage. Costs associated with
reverse mortgages are much higher than for conventional mortgages. It is not uncommon for fees and costs associated with obtaining a reverse mortgage to be 10-20% of the amount of the reverse mortgage. Fees can easily amount to more than $10,000.

This is not to say these fees are excessive; reverse mortages are not only complex but also very costly loans to administer. In large part this is because the main attraction – never having to pay back more than the value of your home no matter how long you live – is a feature paid for by insurance fees charged to borrowers.

Also, the number of reverse mortgages issued annually across the country (about 50,000) and the number of lenders who deal in reverse mortgages (about 1,200) are relatively small compared to the conventional mortgage and home equity loan markets. As the reverse mortgage market grows it’s likely that administrative efficiencies, innovations and increased competition for business will help drive these costs down.

But for now, from the borrower’s point of view, the only way to justify paying the high upfront costs is to carry the loan for several years – at least seven. It’s easy to see that a 95-year old has a limited odds of doing this.

The “Goldilocks” age – not too young and not too old – best suited for reverse mortgage borrowers seems to be the mid-seventies. And, in fact, the actual average age of Home Equity Conversion Mortgage (HECM) borrowers in 2004 was 74 according to the US Department of Housing and Urban Development (HUD).

A 74-year old male can expect to live 10.38 more years, according to the Social Security Administration. At this age a borrower can obtain a reverse mortgage equal to a healthy share of their home equity and still expect to hold the loan long enough to amortize upfront costs. This assumes, of course, the borrower is in good health. Health problems are an important consideration and are addressed later in this report.

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