Baby boomers are often unprepared for retirement and have significant retirement savings gaps. Many senior homeowners have substantial home equity but fixed incomes that are insufficient to cover living expenses. Reverse mortgages can potentially help by providing lump sums or monthly distributions to cover costs, while allowing seniors to remain in their homes without monthly mortgage payments. However, reverse mortgages also carry risks like negative amortization that must be carefully managed to avoid undermining home equity. The document examines how reverse mortgages work using a sample case of a couple taking out a reverse mortgage.

1. How Do
Reverse
Mortgages
Work?
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2. The Problem
• Few seniors have enough savings
for retirement
• 40% ofBaby Boomershave no
retirement savingsat all (CNBC)
• On average, people age 55-64 expect
to make $45k annually during
retirement, but only have the savings
to generate ~$10k annually. They
face a $35k+ annual income gap
(WSJ)
• Consistent across generational
groups, race, and political affiliation.
• Seniors face rising health care costs,
longer life span
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Baby Boomers are not prepared for retirement.
*See final page for citations

3. The Problem
• 65% of senior homeowners own
their house outright.
• $130,000 in home equity on average
• Housing costs for people age 55+
account for 36-38% of total
spending (US Customer Expenditure
Survey)
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Baby Boomers Have Home Equity

4. Saving Grace?
• Lump sum disbursements can help cover large expenses, like medical bills
• Monthly distributions can help cover income gap
• Lack of monthly mortgage payment secures housing arrangement while
reducing monthly expenses
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Reverse Mortgages have potential to solvethe issue

5. This Risks
• Complex product, borrowers needto be educated prior to closing
• Negative amortization can severelyreduce or eliminate any home equity
• Adjustable interest rateswhen borrowers receive monthly disbursements,
which create volatility.
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If used improperly, reverse mortgages can be dangerous!
To reduce the risks associated with these loans,
it’s important to understand how they work.

6. Test Case
To show how reversemortgages work, we will work through a sample loan
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7. Principal Limit
• Principal limits are based on an
“interest rate factor.”
• FHA determinesthe interest rate
factor based on the interest rate
of the loan & the age of the
youngest borrowers
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The maximumloan amountis called a Principal Limit
Gert & Bernie’sPrincipal Limit is $222,400

8. Equity Blocks
• Part of the home is reservedfor
the homeowner’s use
• The remaining equity is reserved
for the interest on cash used by
the borrower
• Dividing the home helps protect
it from going underwater, which
would be bad for both the lender
and the homeowner
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The principal limitdivides the home equity

9. Equity Blocks
• Homeowner’s equity is used for
cash disbursements, paying off
existing mortgage debt, and loan
costs & Fees
• Couple uses Lump Sum payment to
cover medical bills & other costs
• Reverse mortgage used to
refinance previous mortgage debt
• Loan costs are rolled into the loan
• Lender’s reservesare used to
cover accrued interest for the
above costs
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At the close of the loan,
some equity is used…

10. Long Term Consequences
• View our Reverse Mortgage Guide
• Finish reading ”How Does A Reverse Mortgage Work” to follow Gert & Bernie
through the rest of the process
• Learn about the Long Term Effects of a ReverseMortgage, including:
• How long does a reverse mortgage last?
• Can you pay off a reverse mortgage?
• What happens when you sell the home?
• Read our article Pros& Cons: 29 Things To Know About ReverseMortgages
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To see what happensto Gert & Bernie…

11. Citations
• CNBC - http://www.cnbc.com/2015/04/13/retiring-well-not-most-
baby-boomers.html
• WSJ - http://blogs.wsj.com/economics/2015/10/26/baby-boomers-
hugely-underestimate-what-they-need-for-retirement/
• Consumer Expenditure Report -
https://www.bogleheads.org/wiki/Surveys_of_retirement_spending#Av
erage_spending_by_age_ranges_-_CE
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