Feds: Beware the Sugar-Coated Reverse Mortgage

Photo (cc) by aag_photos

If you believe the advertising hype, a reverse mortgage looks like an easy, risk-free way of bridging financial gaps in retirement. But that’s often not the reality, the Consumer Financial Protection Bureau warns.

“While reverse mortgages can help some older homeowners meet financial needs, they can jeopardize retirement security if not used carefully,” the CFPB said in a new report on reverse mortgage advertising.

In a nutshell, a reverse mortgage is a type of loan that allows older homeowners (ages 62 and up) to borrow against the accrued equity in their homes. It’s a way for seniors to convert their home equity into cash, while still keeping their home. It can be a good option for retirees who have a lot of home equity, but little income.

But here’s the deal: Reverse mortgages need to be repaid if the borrower dies, moves or no longer lives in the home. And seniors could lose their homes if they fail to meet the requirements of the loan, such as paying homeowners insurance and property taxes.

Plus, with seniors living longer than ever before, reverse mortgage borrowers risk outliving their loans.

Unfortunately, many ads for reverse mortgages only tout their benefits – cash to help you enjoy your golden years – without mentioning the risks, the CFPB said. What’s worse, some advertising contains inaccurate, incomplete and confusing information about reverse mortgages that misleads consumers and puts them even more at risk.

The CFPB encourages seniors to consider these facts about reverse mortgages:

  • Reverse mortgages are not a government benefit. A reverse mortgage is essentially a home loan with fees and compounding interest that need to be repaid.
  • You could lose your home. If you fail to meet the requirements of the reverse mortgage, you could trigger a loan default and potentially lose your home.
  • You could outlive your loan money. Americans are living longer today than ever before. If you tap into your home equity too early, you risk outliving the loan and draining a potential source of income you may need later in retirement. “It’s important for those considering a reverse mortgage to understand how long their loan proceeds will last them given the loan’s interest rate, their living expenses, home equity balance, and age,” the CFPB said.

The moral of the story here is to do your homework. Don’t take ads for reverse mortgages at face value. Make sure you understand the borrower requirements, government insurance and risks before you pursue a reverse mortgage.

If you’re wondering if a reverse mortgage may be a good option for you, check out “Ask Stacy: Should I Take Out a Reverse Mortgage?”

You can also bring your questions to a HUD-approved housing counselor in your area.

Have you seen ads for reverse mortgages? Do they leave you confused? Share your comments below.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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