Reverse mortgages: What homeowners (don't) know and how it matters

- Reverse mortgages let elderly homeowners consume home equity without leaving the home.
- Demand is low compared to predictions.
- We assess reverse mortgage knowledge among U.S. homeowners and its relation to demand.
- Awareness of reverse mortgages is high, but knowledge of contract terms is limited.
- Low knowledge and misunderstanding of the product relate to low demand.

Reverse mortgages allow elderly homeowners to unlock and consume home equity without leaving their homes. Relative to the number of elderly homeowners with limited financial resources, the take-up rates of reverse mortgages are low. To understand the low take-up rates we first survey U.S. homeowners aged 58 and older assessing their knowledge (literacy) about the most popular reverse mortgage product, the Home Equity Conversion Mortgage (HECM). Next, we study the relationship between knowledge and the intention to use a HECM. Awareness of reverse mortgages is high, but knowledge of contract terms is limited. More knowledgeable homeowners and those with peers who have a reverse mortgage express greater intention to use such a product. Respondents who would benefit most from reverse mortgages (those with low incomes and limited savings) express greater intention to use reverse mortgages, but lack knowledge of the contract terms. Our findings suggest that take-up rates might be increased through improving knowledge about contract terms or changing the product's design to make it easier to understand in the first place.