Commercials about reverse mortgages have been all over the airwaves with celebrity spokesmen encouraging seniors to learn more and take one out.
In one of the countless commercials that the American Advisory Group has been airing nationally, former presidential candidate Fred Thompson talks about the tax-free cash that a reverse mortgage provides seniors, which allows them to “simply enjoy your retirement more.” And, as the ad repeatedly states, with a reverse mortgage “you continue to retain ownership of your home.”
Do seniors who take out a reverse mortgage really get to keep their home? And, are these mortgages as good as they sounds?
Not exactly – that’s the answer to both questions.
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NBC Bay Area reached out to Consumers Union – the policy and action division of Consumer Reports – to better understand this financial tool and the associated risks.
Norma Garcia, a senior attorney at Consumers Union, explained that seniors who get reverse mortgages have to jump through a number of hoops to keep their homes. And, in most cases, if the elderly borrower moves or passes away, the house has to be sold in order to pay off the mortgage.
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“This is definitely a buyer beware situation,” said Garcia. “The difficulty is that it’s often hard for people to understand exactly what they’re getting in to.”
So what are reverse mortgages and how do they work? This is how the Consumer Financial Protection Bureau (CFPB), a federal agency, explains them:
“A reverse mortgage is a special type of home equity loan sold to homeowners aged 62 and older. The loan allows homeowners to access a portion of their home equity as cash. In a reverse mortgage, interest is added to the loan balance each month, and the balance grows.”
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Garcia said many seniors who take out a reverse mortgage don’t fully understand that in order to keep their homes, they must pay their property taxes, stay current on their homeowner’s insurance and maintain their property. Failing to meet any one of these three requirements can put the home at risk of being seized by the mortgage company.
Another thing seniors don’t fully understand is the potential impact reverse mortgages can have on their family members.
As Garcia explained, “What happens to individuals who aren’t on the loan? You have an adult child living with you who’s disabled or you care for grandchildren who aren’t on the loan…if you die, they don’t get to stay in the home [unless they can pay off the loan balance in full]! A big issue to be aware of is that many households are multi-generational.”
Like other senior citizen advocates, Garcia doesn’t completely dismiss reverse mortgages and said that if an elderly person has nowhere else to go and needs money, it can make sense to take one out. But she emphasizes the importance of consulting family members and an impartial financial advisor.
The CFPB urges seniors in a 4-page handout to keep the following things in mind when considering a reverse mortgage:
- Don't sign the loan documents unless you understand how a reverse mortgage works.
- Know your options -- you may have a better choice.
- Have a serious talk with a counselor before you make any decisions.
