Reverse Mortgage Reality Check

The Consumer Financial Protection Bureau (CFPB) conducted a focus group study on reverse mortgage advertisements in 2015.[1]Based on that study, they issued an advisory to consumers not to be deceived by advertising. The advertising the CFPB reviewed found incomplete, confusing and inaccurate statements regarding borrower requirements, government insurance and borrower’s risks. Many in the focus group were confused or had misconceptions about important features and terms of the reverse mortgages.

Here are some of the problems they found with the advertising they reviewed, and what those consumers in the study inferred from the advertisements.

Consumers Did Not Understand That a Reverse Mortgage is a Loan

The reverse mortgage is a loan. It must be paid back at some point in the future. There are no monthly mortgage payments, but it is a loan that is paid back. Because there are no monthly mortgage payments, interest and mortgage insurance is added to the loan balance. The loan balance grows over time with compounding interest.

Consumers Misunderstood What Tax Free Meant

While the proceeds of the loan are tax free because it is a loan, it is not income (consult with your tax advisor). It does not mean you no longer need to pay your property taxes. You are required to pay your taxes and insurance and maintain your home.

Consumers Thought Reverse Mortgages Were a Government Benefit

Reverse mortgages are not a government benefit. They are a mortgage loan. Most reverse mortgages are HECM’s, or Home Equity Conversion Mortgage, which are insured by the FHA, the Federal Housing Authority. The program is not directly administered by the government nor does the government loan money. They are not a stimulus program instituted by the President either.

Consumers Thought Reverse Mortgages Would Allow Them to Live in Their Home Forever

Nobody lives forever. Second, there area variety of things that can happen where you may not be able to live in the house any longer. If you do not pay your taxes, insurance, HOA dues or do not maintain your property, the lender can foreclose on your home. You may not have the funds or physical ability to maintain your home properly. You may no longer be able to live on your own. In other words, a reverse mortgage does not guarantee that you will be able to live in the home forever.

Consumers Thought They Could Not Outlive a Reverse Mortgage

Forward, or regular mortgages, have a payback term which varies, but the most common terms are a 15-year or 30-yearloan. There is no term with a reverse mortgage. In other words, there is no set period as to when the loan needs to be paid back, which means you cannot outlive the loan. What you need to be aware of is that you could outlive the proceeds from a reverse mortgage. This is determined by your spending habits and monetary needs. The one exception to this is if you choose the tenure loan option which guarantees a monthly payment to you for as long as you live in the home.

Consumers Thought Reverse Mortgages Are Risk Free

There are risks associated with any mortgage. There are certain risks with a reverse mortgage that homeowners need to be aware of. If you do not pay property taxes, insurance, HOA dues and maintain the property, you could lose the home to foreclosure. All your equity may be used up through a growing loan balance. You may run out of money. You may be unable to move. You may not leave any equity to your heirs.