Reverse mortgages can turn out to be an expensive way to borrow

You have seen the ads on TV, in print and maybe even direct mail to your home. Know the facts before you act.

You may know people who are trying to sort through what happens when the person who lived in the home no longer lives there or dies. Below is general information from the sources identified. It is not legal advice nor regulatory guidance.

What is a reserve mortgage?

A Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a special type of home loan only for homeowners who are 62 and older.

A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan. When you take out a reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home.

Interest and fees are added to the loan balance each month and the balance owed grows. With a reverse mortgage loan, homeowners are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition.

The amount of money you can borrow is based on how much equity you have in your home. While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky.

With a reverse mortgage loan, the amount the homeowner owes to the lender goes up – not down – over time. A reverse mortgage is a loan where borrowed money + interest + fees each month = rising loan balance. The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home.

With most reverse mortgages, you have three business days after the loan closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.”

To cancel, you must notify the lender in writing. Send your letter by certified mail and ask for a return receipt so that you have documentation of when you sent and when the lender received your cancellation notice. Keep copies of any communications between you and your lender.

After you cancel, the lender has 20 days to return any money you’ve paid for the financing of the reverse mortgage loan. If you believe there is a reason to cancel the loan after the three-day period, seek legal helpto see if you have the right to cancel.

Scams related to reverse mortgages

Beware of contractors who approach you about getting a reverse mortgage loan to pay for repairs to your homes. It may be a scam. Don’t let yourself be pressured into getting a reverse mortgage loan.

The Department of Veterans Affairs (VA) does not offer any reverse mortgage loans. Some mortgage ads falsely promise veterans special deals, imply VA approval, or offer a “no-payment” reverse mortgage loan to attract older Americans desperate to stay in their homes.

Risks: Debt up, equity down

A reverse mortgage increases your debt and can use up all your equity. It is a loan. Your debt goes up and your equity goes down.

A reverse mortgage can limit your options down the road.Generally, a reverse mortgage must be paid back when you die or move from the home. You could use up your equity, so you get nothing when you or your estate eventually sells the home. That means you could come up short if you want to move to a smaller home, an assisted living facility, or to another locale to be closer to family.

It can be an expensive way to borrow. Fees and other costs to borrow money can be higher than other options.

Things to consider before getting a reverse mortgage

How will it affect your family? Find out how your spouse or other family members who are living in the house when you take out a reverse mortgage will be affected. Will they be able to stay in the home if you move to a health care facility or die? Planning on passing the home on to family, you pass on the debt also.

What your heirs will own: Look for a “non-recourse” clause. It means that you or your estate can’t owe more than the value of the home when the loan becomes due and the home is sold. Ask how the home’s value is appraised.

If you are considering a reserve mortgage

Talk to your family. Consider all options for financial needs.

Meet with a housing counselor: Call 1-800-569-4287 for information. There is a fee.

Sources:

Consumer Financial Protection Bureau--https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-224/

Federal Trade Commission--https://consumer.ftc.gov/articles/reverse-mortgages#how