Don’t Apply for a Reverse Mortgage Until You Fully Understand the Loan’s Pros and Cons
You have probably seen ads that promote Reverse Mortgages. These ads seem to promise the moon, with headlines such as “A Reverse Mortgage Can Provide Financial Freedom for Your Retirement” and “A Reverse Mortgage can Revolutionize your Senior Years.” For individuals who are exploring the options of taking a Reverse Mortgage, it’s important to remember that ads are just that – advertisements which purport to provide potential borrowers with all of the reasons that they need to take out a Reverse Mortgage.
Many potential borrowers are so bowled over by the thought of obtaining cash based on the equity that they hold in their home that they forget that the ads only tell half the story. According to a recent study by the Consumer Financial Protection Bureau, most reverse mortgage ads leave out important information about the loan. In the best circumstances, seniors are confused, while in the worst case scenario, they think that the loan offers benefits which in reality are unattainable. These individuals aren’t sufficiently prepared for the obligations that they assume under the loan’s terms.
Here’s a summary of the Reverse Mortgage, including the pros and cons that you should consider before obtaining such a loan.
A reverse mortgage is a special type of loan which is available to homeowners aged 62 years or older. The loan allows borrowers to convert their home equity into cash. The loan’s balance becomes due, with interest, when the borrower dies, moves, or sells his/her house.
Some important points about the Reverse Mortgage:
*A reverse mortgage is a loan, not a benefit. The CFPB study shows that many seniors don’t understand this point, mainly due to the ads which imply that obtaining a Reverse Mortgage can assure the borrower financial security for the rest of his/her life. It’s important to understand that the terms of the loan state clearly that Reverse Mortgage borrowers maintain responsible for paying homeowner’s insurance and property taxes after they’ve taken out the loan. They are still responsible for maintaining their property. Failing to meet these requirements, along with failure to pay the loan’s monthly interest charges, can trigger a loan default that will result in foreclosure.
*A reverse mortgage is not a government loan. Ads often leave seniors with the false impression that a reverse mortgage is a risk-free government benefit with federal protections. The lending institution, which is a commercial enterprise, originates the loan and collects its fees. The loan is insured by the Federal Housing Administration. This insurance protects the borrower in case a lender goes bankrupt and protects the lender in case the borrower defaults. But the FHA DOES NOT originate the loan, nor does it accept responsibility for borrowers who don’t meet their loan obligations.
*The requirements of the HECM loan are often unclear to the potential borrower. Many of the reverse mortgage ads that were reviewed by the CFPB did not mention critical information about the loan such as interest rates and repayment terms.
As you can see, it’s important that potential HECM (Home Equity Conversion Mortgage) borrowers and their families educate themselves on how the reverse mortgage really works. These mortgages are fairly complicated, and it’s important to understand the terms and risks.
Reverse Mortgages are particularly appropriate for:
1.A person who doesn’t qualify for a home equity loan or a line of credit – the looser credit and income requirements make it easier to get a reverse mortgage.
2.A person who has medical bills or other high expenses. A HECM loan can provide the cash flow needed to navigate such situations.
3.A person who has significant equity in his/her house and is older than the minimum eligible age. The more equity the person has in his house and the older he is at the time that s/he signs for the loan, the more money s/he can draw from a reverse mortgage.
4.A person/couple who have no heirs who will want the house upon the owner’s passing.
Reverse mortgages are complex but with proper understanding of the loan’s ins and outs, a borrower can make the Reverse Mortgage work for his/her benefit.