Understanding Reverse Mortgages
These days it's more and more difficult to secure your future, specifically in regards to your retirement and the funds that go along with it. So many companies offer an out with tempting advertising, one of the most appealing being the "Reverse Mortgage." While we're not here to brand them as the poison apple, it's important that you understand the fine print before you sign up for one. A recent Consumer Financial Protection Bureau (CFPB) study found that a number of Americans failed to fully grasp the consequences of the Reverse Mortgage, one of the largest of which can be the loss of their home.
According to their June 2015 study: "A Closer Look at the Reverse Mortgage Advertisements and Consumer Risks" many borrowers are swayed into a number of misconceptions with taking out a Reverse Mortgage. We're here to outline just a few of them.
The first misunderstanding is that a Reverse Mortgage is not a loan. It is!! Like many loans, they come with a stack of requirements. A few of which are that you maintain your home (otherwise it's value could be depleted which in turn depletes the value of the equity you've just given up).
"Reverse mortgage borrowers are responsible for several requirements, including paying property taxes, homeowner's insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure. "
Another misconception is that these lenders are associated with the government and misunderstand the involvement of the US Government in this program. A number of advertisements use 'American' symbols such as the eagle, scroll etc. to gain trust and convince borrowers that these solutions are government mandated such as Medicare. Make no mistake, these are lenders who require that borrowers uphold the loan agreement, and require that proceeds are repaid with interest.
The false imagery to closely associate lenders with the government can lead borrowers to think they are not meant to repay the loans since they are mandated rather than offered.
"The marketing of reverse mortgage proceeds as "tax free" unquestionably contributed to some consumers' confusion that reverse mortgages are not loans. "
Since you are required to repay these loans, it should go with out saying that they carry interest rates, but many Americans are lead to believe otherwise. Many of these lenders conveniently use fine print to state that they come with compound interest rates on the proceeds of that very loan, in exchange for the equity you hold in your home. Some of these ads even omit the interest rates which leads to an even larger misconception.
"Many consumers we spoke with did not understand that reverse mortgages are loans with fees, compounding interest, and repayment terms unless they saw an interest rate explicitly stated in the ad."
The Reverse Mortgage can be a useful tool for those of us over the age of 62, but it's important that you understand all the details and read the fine print to avoid dealing with the unwanted consequences. For a more complete list, take a look at the report in more depth "A Closer Look at the Reverse Mortgage Advertisements and Consumer Risks"