Reverse mortgages are gaining popularity as a way for seniors to enhance their retirement security. According to Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA), “Since the program began, consumers have taken out a total of 911,314 reverse mortgages. Bell said he expects that number will hit 1 million in the first half of 2016.”1
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 You can receive the loan proceeds in a lump sum, monthly payments or as a line of credit. The loan typically becomes due when the borrower moves out of the home as their primary residence or passes away. At that time, the borrower or their heirs can choose to repay the reverse mortgage loan and keep the house, or sell the home to repay the loan.
Unfortunately, reverse mortgages have also become a popular target for those looking to take advantage of consumers. Researching reverse mortgages can be intimidating. These products are complex and there is a lot of information out there. Protect yourself by being educated about the product and how it works and make sure you ask a lot of questions. Below are some things to be aware of when shopping for a reverse mortgage.
- Watch out for lenders that tell you it’s a requirement or push you to invest the loan proceeds into another investment vehicle such as an annuity. It’s a good idea to consult your financial advisor regarding any investment decisions.4
- Be wary of lenders that advertise loans that are “no cost or no fee”. There is always a cost, however usually most of these costs can be financed as part of the loan.5
- Look out for anyone charging a fee that’s as high as the amount of proceeds you would receive from the loan. If this happens, consider either looking for another lender or talk to a trusted financial professional to ask if the fees seem reasonable and normal.4
- Be careful of lenders that advertise HECM loan programs as a “government loan”, “government benefit” or a lender that states their loan is “HUD or AARP approved”. HECM loans are insured by the Federal Housing Administration (FHA).5
- You should never be asked to pay a “finding” fee when it comes to finding a lender. The Department of Housing and Urban Development (HUD) publishes a list of FHA-approved lenders.4
- Be cautious of lenders that advertise exaggerated or misleading benefits such as “We (the lender) pay off your loan.”5
- Scam artists are always looking for ways to take advantage of people, so it’s best to be proactive. Guard against identity theft by monitoring your credit report for any loans that you did not take out.4
If you’d like to learn more about reverse mortgages, please use our Reverse Mortgage Calculator Calculator or call 800-218-1415.
1 10 Things You Should Know About Reverse Mortgages – cbsnews.com, by Ilyce Glink, 1/11/16, http://www.cbsnews.com/media/10-things-you-need-to-know-about-reverse-mortgages/.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
4 The 4 Most Common Mistakes Made When Seeking a Reverse Mortgage – houselogic.com, by Barbara Eisner Bayer, 11/4/13, http://www.houselogic.com/home-advice/reverse-mortgages/biggest-reverse-mortgage-mistakes/.
5 NRMLA Guidance on Ethical Advertising – nrmlaonline.org, https://www.nrmlaonline.org/2015/06/04/nrmla-dirty-dozen-unethical-advertising-practices.
Author: Meredith Manz