Most people become eligible for full Social Security benefits between ages 66 and 67, though a person may start to collect benefits as early as age 62. If you choose to claim benefits early, the monthly amounts are permanently reduced, sometimes by as much as about 30%. A person may also delay benefits until age 70 to get the maximum monthly benefit.
Sometimes, mortgage brokers and lenders advise homeowners to take out a reverse mortgage and delay getting Social Security benefits until they’re older. The theory is that the reverse mortgage proceeds will replace the income that Social Security benefits would have provided in the years between the minimum benefits age—age 62—and the full benefits age or thereafter. Then, because the homeowner delayed taking Social Security benefits, the monthly benefit is permanently higher later on. Usually, though, this isn’t a good idea. Read on to find out why.
Financial professionals typically recommend that people hold off on applying for Social Security, if possible, which will increase their monthly benefits. By claiming benefits at the full benefit age or later—rather than collecting early—a person receives a permanent increase in monthly payments and potentially a higher cumulative amount over a lifetime.
For example, suppose Maddie—a 62-year old woman—lives to age 85. If she claims a monthly benefit of $1,300 at age 67, rather than claiming $910 when she turns 62, she’ll get $29,640 more in overall benefits during her lifetime.
But not everyone can afford to put off receiving Social Security. Around 40% of people claim their benefits at the earliest eligibility age, which means a lower monthly Social Security amount.
A reverse mortgage is a kind of mortgage for homeowners age 62 and older. With a reverse mortgage, the homeowner typically receives monthly payments from the lender. The loan balance gets bigger each time the lender sends a payment, until the maximum loan amount is reached. (A reverse mortgage borrower may also get the loan as a line of credit, a lump sum, or a combination of monthly installments and a line of credit.)
The homeowner doesn’t have to repay the reverse mortgage unless or until a specified event happens, like the borrower dies, moves, sells the home, or breaches the mortgage agreement. These events are sometimes called "triggering" events because when one of these things happens, it triggers the borrower's obligation to repay the loan. (Learn more general information about reverse mortgages.)
By getting a reverse mortgage, a homeowner may use the loan proceeds to cover expenses during a delay in claiming Social Security benefits. Basically, the reverse mortgage money replaces the income that the homeowner would otherwise get in Social Security benefits between the minimum benefits age—age 62—up to the full benefits age, which is, again, between ages 66 and 67 (depending on the person’s birth date) or the maximum benefits age, which is age 70.
Because the homeowner puts off taking Social Security benefits at an early age, the result is a higher monthly amount after the delay.
According to the Consumer Financial Protection Bureau (CFPB), the costs and risks associated with a reverse mortgage tend to be much greater than the overall, cumulative increase in Social Security benefits a person would receive in a lifetime after delaying Social Security benefits.
Why is a reverse mortgage generally more costly? Interest, mortgage insurance premiums, and fees are charged over the course of a reverse mortgage. Also, origination and closing costs may be included in the loan. When added up, those costs typically exceed the cumulative additional amount of Social Security benefits a borrower would get by delaying a claim.
Why is a reverse mortgage risky? Reverse mortgages come with some major risks, including foreclosure, if you don’t meet the terms and conditions of the loan or if one of the triggering events happens. For example, if your health declines and you have to move into a care facility, like a nursing home, the lender can call the loan due after you’ve been out of the home for more than 12 months. You’ll then have to pay back the loan or the lender will foreclose. Also, if you don’t pay the property taxes or homeowners’ insurance (assuming you don't have a set-aside account), fail to keep the property in reasonable shape, or breach any of the other mortgage requirements, the lender can foreclose
In addition, because a reverse mortgage decreases your equity in the home, taking out a reverse mortgage could limit your options in the future. For example, because your equity will be considerably reduced if you get a reverse mortgage, you’ll get less money if you eventually sell the home. This means less money to put towards buying a different home, moving closer to family or friends, or covering a large expense down the road.
For some people, taking out a reverse mortgage to delay Social Security benefits might make sense, but this is not typically the case. If you're thinking about taking out a reverse mortgage as part of a financial strategy to delay collecting Social Security, it is highly recommend that you proceed cautiously. Be sure that you understand all the risks, costs, and conditions involved with reverse mortgages, and beware of scams. Also, consider talking with an elder-law attorney, consumer protection attorney, or trusted financial planner before getting this type of loan to discuss other possible options.
For more information about the risks associated with taking out a reverse mortgage to delay collecting Social Security, read the CFPB’s August 2017 report. For general information about reverse mortgages, including details about the downsides to getting this type of loan, read the CFPB’s discussion guide. To learn how reverse mortgage advertisements are often misleading, read the CFPB's June 2015 advisory.