Q: I frequently see TV ads for reverse mortgages. They make this sound like it’s a great idea. Is it?
A: This may be a good option for a very few people, depending on their reasons for buying and the terms and fees involved. But whether a reverse mortgage is right for you depends on your personal situation. You should be aware that reverse mortgages can come with distinct downsides.
Daytime television is awash in ads from celebrities plugging reverse mortgages offered by institutions seeking to capitalize on many retirees’ need for immediate cash to pay living expenses. The ads, appealing to just about anyone with substantial home equity, make these loans sound as if they can easily assure financial security. But this isn’t necessarily the case. So various consumer protection groups have recently issued alerts and warnings explaining how the loans work and calling attention to their seldom-mentioned disadvantages.
Reverse mortgages are interest-bearing loans from financial institutions where borrowers use their homes as collateral. To be eligible, you and any co-borrowers (such as your spouse) must own your home and be 62 or older — although some lenders this product to individuals as young as age 60. Instead of the borrower paying the lender monthly mortgage payments, the lender pays the borrower, typically in installments – the reverse of a regular mortgage, hence the name. Usually, borrowers are living on a fixed income and so may have limited creditworthiness. Many are having trouble making ends meet but want to remain in their homes. So they leverage what is usually for most, their primary asset–their home equity.
Unlike other home loans, with reverse mortgages you make no interest or principal payments during the life of the actual loan. Instead, the interest is added to the principal amount so that your balance continues to grow. Unless you choose a fixed-term loan, the balance usually isn’t due until you die, sell your home or move. Typically, the balance is paid when the home is eventually sold, often after the owner has died. These loans appeal to people who wish to remain in their homes and don’t plan to leave them to heirs.
Reverse mortgages may be a viable option for those who lack the creditworthiness to get other types of collateralized loans. For those on more secure financial footing, who have more borrowing options (and can access home equity loans), reverse mortgages are often undesirable because they’re typically quite expensive. Compared with those of conventional home equity loans, fixed costs from up-front fees can make reverse mortgages unacceptably pricey, especially for those who’ve been planning to remain in their homes for only a few more years.
Because many people don’t fully understand reverse mortgages, the Consumer Financial Protection Bureau (CFPB) has issued alerts explaining them and warning people about substantial downsides.
Among these warnings is that, contrary to the impression left by some ads, it’s possible to lose your home with a reverse mortgage. Some ads say you can remain in your home as long as you like, but this is true only if you are able to continue to meet all of the loan obligations, such as property taxes, insurance, home maintenance costs and other requirements. If you don’t, the lender may exercise an option to foreclose on your home, leaving you in the worst possible situation — no place to live and no home equity to draw on.
If you decide to consider pursuing a reverse mortgage, be sure to shop around at several financial institutions and insist on getting all costs in writing. Finally, before signing, be sure to seek the advice of an experienced financial adviser and a qualified attorney, having them review all applicable documents.