Understanding Reverse Mortgages

With baby boomers approaching retirement age, television advertisements geared toward reverse mortgages are now more prevalent than ever.  Before entering into a reverse mortgage, it is very important to fully understand its terms and conditions, because although it can be a useful instrument, it may have nightmarish consequences for a homebuyer who doesn’t fully understand its concept and its ramifications.  This is especially true given the recent complaints submitted to the Consumer Financial Protection Bureau (CFPB) citing consumer confusion and frustration over the terms and conditions of the reverse mortgage. [1]

So, what is a reverse mortgage?  Reverse mortgages are a special type of loan which allow homeowners, 62 and older, to borrow against the accrued equity in their homes. This is how it works: Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity.[2]  The money you get usually is tax-free.[3]  Generally, you don’t have to pay back the money for as long as you live in your home.[4]  When you pass away, sell your home, or move out, you, your spouse, or your estate would repay the loan.[5]  (For more information on reverse mortgages, please see articles issued by the CFBP: http://www.consumer.ftc.gov/articles/0192-reverse-mortgages and http://files.consumerfinance.gov/f/201409_cfpb_guide_reverse_mortgage.pdf.)

Why all the consumer confusion regarding the reverse mortgage?  The confusion cited in the CFPB rulings was over the belief by consumers that the reverse mortgage is a government loan or benefit, or worse yet, that it guaranteed that homeowners could stay in their homes for the rest of their lives.  On the contrary, you can actually lose your home with a reverse mortgage if you fall behind on your property taxes or homeowners insurance, or if you are absent from your home for longer than six months, or if you fail to satisfy other requirements, thereby triggering a loan default and possible foreclosure.

In sum, reverse mortgage loans are simply a specialized way that seniors can tap into their home’s equity – value that has built up over the years.  While it is true that they are designed so that the homeowners do not have to repay the loan until they pass away, sell or move out, it is no guarantee that other factors (such as taxes, homeowner’s insurance, and maintenance expenses) might not still cause a default should the borrower run out of money.

If you are considering a reverse mortgage and/or have any questions regarding a reverse mortgage, your best bet is to discuss the details with a trusted financial advisor or a federally-approved housing counselor.  Should you need any further information in your real estate needs, please feel free to reach out to PSL Realty at any time at 424.333.0557 or plissia@pslrealty.com.

Paolo Lissia

[1] http://files.consumerfinance.gov/f/201502_cfpb_report_snapshot-reverse-mortgage-complaints-december-2011-2014.pdf

[2] http://www.consumer.ftc.gov/articles/0192-reverse-mortgages

[3] Id.

[4] Id.

[5] http://files.consumerfinance.gov/f/201409_cfpb_guide_reverse_mortgage.pdf

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