Retirees rack up record debt

by Center for Personal Finance editors

WASHINGTON (9/28/06)--Families in or near retirement are racking up more debt than ever before, and housing seems to be the main culprit (ebri.org Sept. 2006).

A recent study by the Employee Benefit Research Institute revealed that 61% of families with heads of households aged 55 or older had debt in 2004, five percentage points higher than in 2001. Their average total debt level jumped from $29,309 in 1992 to $51,791 in 2004, and median (half above, half below) debt level rose from $14,498 to $32,000, a 121% increase.

Data on families with a household head aged 75 or older is also disturbing. Their average debt level rose to $20,234 in 2004 from $7,769 in 1992--a 160% increase. Median debt for this age group rose to $14,800 in 2004 from $4,218 in 1992--a whopping 250% increase.

The main reasons behind the increases: Homeowners were refinancing mortgages, cashing out equity in their home, and facing rapidly increasing home values during 2001 to 2004 when buying a home.

Older homeowners who are house-rich and cash-poor may want to consider a reverse mortgage, but don't jump to a decision until you understand the tradeoffs and pitfalls in addition to the benefits.

Although this type of mortgage allows you to stay in your home and receive payments from the lender based on your home's equity, remember that your heirs will get less--perhaps quite a bit less--depending on how much you borrow against the equity. Fees may be as much as 5% to 6% of the home's value. If you're thinking of moving or selling your home within a few years, you lose the benefit of amortizing those fees over a longer period of time.

Talk to professionals at your credit union about whether a reverse mortgage is right for you. Also, AARP has fact sheets, articles, and an online calculator to help you figure how much money you'd be able to borrow. Go to aarp.org and type "reverse mortgage" in the search box.

For more information, read "Into Reverse, With Caution: Details About Reverse Mortgages" in the Home & Family Finance Resource Center housing section.