AJC Business 01-NOV-2015
REVERSE MORTGAGE ADS CAN BE MISLEADING
by John Adams
The ads for reverse mortgages often sound too good to be true. You can’t be turned down. There are no monthly payments required – ever. You get access to equity tied up in your home. And you can stay there forever – with no monthly payments – forever.
Who wouldn’t want to sign up for that?
A reverse mortgage is a special type of loan that allows homeowners 62 and older to borrow against the accrued equity in their homes. The loan must be paid back when the borrower dies, moves, or no longer lives in the home.
I’d like to begin by saying that there is nothing inherently wrong with the concept of a reverse mortgage. It is an interesting and novel way to allow some seniors to stay in their home when all other avenues may be blocked.
But a recent study by the CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) found that many ads for Reverse Mortgages were misleading, and that many consumers thought these products were, in fact, a government benefit for seniors, rather than a true mortgage loan.
I am not criticizing the loan program itself, only the ads that show enticing images of youthful retirees enjoying rounds of championship golf or other leisure activities.
It is important to realize that a reverse mortgage is a home loan like any other mortgage, and if you fail to meet the terms of the loan, you can and will lose your home to foreclosure.
Here are some facts to know:
* Under a REVERSE MORTGAGE, you borrow a portion of the equity in your home, and decide how to spend the money in any manner you choose.
* Any money you borrow is secured by your house, just like any other home loan.
* You are charged interest on the outstanding balance, just like any other home loan.
* And just like any other home loan, your home is collateral for the loan balance.
So, why is that a surprise to anyone?
Because of the nature of a reverse mortgage:
1. It’s for seniors who own their home free and clear of any debts (or owe only a small amount).
2. Loan qualification is very simplified because the loan is secured by the equity in your home.
3. There are no required monthly payments.
4. You can stay in your home with no monthly payments for as long as you live there.
4. When you relocate (or pass away), the loan (plus all the accumulated interest) becomes due. It is assumed that the house will then be sold to pay off the loan.
5. The loan has relatively high upfront costs and a relatively high interest rate, compared to a conventional fixed-rate home loan.
So, if you, or members of your family, are considering applying for a reverse mortgage, here’s my advice:
1. Make sure you understand all the details before you commit to a reverse mortgage. or any type of loan for that matter. It is not a guarantee of financial security.
2. Know that there is almost always a less expensive option than a reverse mortgage. Creative family assistance and home equity loans should be explored.
3. Consider a reverse mortgage as a last resort if you own your home, need money, and can’t find any other way to get it.
Finally, be certain that you understand the following:
A reverse mortgage is not a government benefit for seniors. It is just like a Home Equity Loan that requires no payments until you move or pass away. You can probably find a better alternative.
Again, I want to state that I am not opposed to the idea of reverse mortgages. They can be a useful loan product when their features match the need.
But when any lender misrepresents a home loan product to the extent revealed in the CFPB study, it should be a cause for public concern.
The read the CFPB Consumer advisory and the complete study results, visit my website at Money99.com and click on “Reverse Mortgages.”