If you watch TV, you have probably seen commercials that promote the various benefits of reverse mortgages. Usually, it’s a well-known celebrity spokesperson, explaining how reverse mortgages work and how to become eligible for these loans.
But what you have heard in these ads may be misleading. The Consumer Financial Protection Bureau (CFPB) recently conducted a study finding that consumers did not have a good understanding of how reverse mortgages work after seeing these commercials.
Many people find reverse mortgage ads to be confusing or misleading.
Here are four important facts that consumers get wrong after seeing reverse mortgage advertising.
After viewing ads, many people are not sure whether reverse mortgages are loans or not.
In fact, a reverse mortgage IS a loan — with fees and compounding interest, like other loans.
A reverse mortgage is a specific type of loan for homeowners age 62 and older that allows you to eliminate monthly house payments and/or convert your home equity into tax-free cash.
When you originally bought your house, you probably borrowed money and have been paying down that amount over time — maybe even borrowing more in the form of a home equity loan — but you have always been paying the loan amount down.
With a reverse mortgage, you are borrowing your home equity — but there are no payments on the loan until you die or permanently move out of the house. You still own the home and get to use it for as long as you want. However, instead of paying interest and paying down the loan amount, you accrue interest on the loan amount and the amount you will eventually owe grows over time. The interest gets added to the amount you have borrowed.
Because there are no monthly mortgage payments and you can get access to money, the loans can be great if your retirement budget needs some help.
Just like a traditional “forward” mortgage loan, reverse mortgages also have upfront fees and require you to remain current on property taxes and homeowner’s insurance associated with your residence.
Like any loan, a reverse mortgage has to be repaid at some point in time. However, many people who see reverse mortgage commercials do not understand the repayment.
Several consumers thought that because the money they received through a reverse mortgage represented home equity they had accrued over time, there was no reason they would have to pay it back.
There were, however, some consumers who noted that ads listing information about interest rates made it clear that a reverse mortgage would be repaid in the future.
So what are the facts regarding repayment of a reverse mortgage?
Repayment is Required When the Loan Comes Due: A reverse mortgage borrower is not required to repay what they owe until the home is vacated. As long as a borrower lives in the home, then he/she isn’t required to make monthly payments towards the loan balance. (Although the borrower is responsible for paying property taxes and homeowner’s insurance fees.)
In terms of vacancy requirements, borrowers are only permitted to live outside of their homes for a total of 12 months before the loan becomes due and payable. In the event that a borrower dies, the reverse mortgage is then paid back. Usually the repayment is accomplished by selling the home.
Heirs: Heirs are allowed to keep any money that is not owed on the loan. Often times the value of the home is greater than the amount owed on the loan. In these cases, the heirs get to keep the difference. Best of all, your heirs will never owe more than the value of your home. (See the next fact.)
You Will Never Owe More Than the Home’s Value at the Time the Loan Comes Due: One of the key features of reverse mortgages is that they are non-recourse loans. This means that you will never owe more than the home is worth at the time you (or your heirs) sell the property to repay the reverse mortgage loan balance.
In the event that the loan becomes due and payable, the loan balance may be satisfied by paying the lesser of the mortgage balance or 95% of the home’s current appraised value.
Several consumers in the CFPB focus group study believed that reverse mortgages were provided by the government and that therefore repayment would not be required.
While reverse mortgages are insured by the federal government under the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program, they should not be confused as a government benefit such as Social Security.
HECMs, which comprise most of the reverse mortgages on the market today, are not government loans. Rather, they are loans issued by a bank or another licensed mortgage lender, but are insured by the federal government via the FHA.
This government backing protects the reverse mortgage borrower if a lender is not able to make a payment. It also protects borrowers by taking them off the hook if the value of the home upon selling is not enough to cover the loan balance. In this event, the government’s insurance fund pays off the remaining balance.
The government’s role in the reverse mortgage market is often misinterpreted, especially when it comes to providing certain borrower protections that aren’t actually afforded. This was one major area of misunderstanding among participants in the CFPB focus group study.
As a result, this misperception has led to one of the biggest and most serious misunderstandings regarding reverse mortgages and their ability to let borrowers age in place.
The essential function of a reverse mortgage is to provide senior homeowners a means to unlock the money they’ve accumulated in their homes for use and to provide an affordable (no house payments) and comfortable (its home) place for them to live.
The whole point of reverse mortgages is to enable seniors to afford to stay in their homes. However, reverse mortgage borrowers must adhere to the terms of the loan in order to insure this is possible.
Loan terms include:
- Reverse mortgages become due when a borrower vacates the home for a period greater than 12 months. That means if a borrower decides to sell his or her home or moves to assisted living after getting a reverse mortgage, the loan balance would come due and payable after a year.
- Borrowers must also adhere to loan terms such as ongoing payment of property taxes and homeowners insurance, and maintenance of the property to Federal Housing Administration standards.
After viewing reverse mortgage ads, participants told the CFPB that they had the impression that a main benefit of a reverse mortgage was the ability to remain in their homes “as long as they want”, based on ads that said, “the title and deed remain in their name.”
While reverse mortgage borrowers DO retain the title and deed, the loans are secured by a lien, and borrowers can potentially lose their homes if they do not abide by loan requirements.
“It is important for all potential reverse mortgage borrowers to understand the real risk of losing their home if they do not fulfill all of the loan’s requirements,” the CFPB wrote in a report on the focus group findings.
It is important to note that as part of the reverse mortgage application process, all prospective borrowers are required to first meet with a counselor approved by the U.S. Department of Housing and Urban Development to discuss reverse mortgages. These sessions are designed to make sure that all borrowers really do understand the product — including all financial implications, repaying the loan, and what happens when the loan becomes due and payable.
If you are considering the prospect of getting a reverse mortgage, or are weighing the decision for an aging parent, the U.S. Department of Housing and Urban Development offers a variety of resources, including a fact sheet on the HECM program, frequently asked questions and reverse mortgage counselor search guide.
“While reverse mortgages can help some older homeowners meet financial needs, they can jeopardize retirement security if not used carefully,” the CFPB said.
