Don’t be too quick to accept all that the ads lead you to believe, the Consumer Financial Protection Bureau warns. They may not be telling the whole story.
The federal agency conducted a study that showed some older homeowners are increasingly complaining that they were given false impressions about reverse mortgages.
Such mortgages are offered to people over 62, some of whom believe they are a government-sponsored benefit that will ensure that they can stay in their home until death. Not so, says the CFPB. They are loans that must be repaid – with interest. In some instances, they result in the loss of the home. Many seniors, long retired and on a fixed income, can’t afford such a financial arrangement.
A scary 10 percent of those who take out a reverse mortgage default on the loan, about twice the rate of defaults on conventional mortgages.
The idea of receiving cash or a line of credit that taps the equity in the home seems attractive to many cash-strapped seniors. They may see the reverse mortgage as a way to pay off debt or to remodel their older homes. They have no loan payments on a monthly basis. But over time, the loan balance increases and it comes due when the borrower dies, moves or sells the home or if it defaults on other obligations such as insurance or taxes. That may come as an unpleasant surprise to survivors.
Most reverse mortgages are insured by the Federal Housing Administration, but they are not a risk-free benefit, something that many of the borrowers do not understand and which the ads don’t warn them of, the CFPB study showed. Too much “fine print” confuses many of the elderly and leaves them vulnerable, the agency warned. Often, they are oblivious to the fact that the loans carry interest, that there are repayment terms and other crucial requirements that may well rear up and bite those who sign on the dotted line without understanding all the relevant factors.
As part of its review of reverse mortgage practices, the CFPB held interviews with some 60 homeowners over age 62 during focus group meetings or in individual sessions.
Spokespersons for the National Reverse Mortgage Lenders Association, on the contrary, say that they have a code of ethics that includes a requirement for accurate advertising. The association, which presents the companies that supply reverse mortgages, says it is committed to educating consumers about the pros and cons of their product and trains lenders to be sensitive to client needs.
Bottom line: no matter what “the Fonz” says, it is wise to make a thorough study of how reverse mortgages work and match the information very carefully with your particular financial situation before acting. It may be the lifesaver you are looking for, but it may be risky enough that you’ll want to look at other options.