A reverse mortgage isn’t right for everyone

A reverse mortgage is a complicated product that make sense for some people but not for others. Be sure you know which category you’re in before getting one.

A reverse mortgage allows people 62 years or older who own their home outright or have significant equity in it to tap their equity without having to sell the home. The loan requires no monthly payments and the funds can be used to finance a more comfortable retirement, pay for home improvements or healthcare, or for other purposes. It’s paid back when the borrower dies, sells, or moves out of the house (for example, to a nursing home).

The amount you can borrow depends on your age and the equity in your home. Most reverse mortgages are federally insured and require you to meet with an approved housing counselor to get advice on whether one is right for you. Discussing it with family members is also a good idea.

Reverse mortgages are heavily advertised on TV, radio, in print, and on the Internet; and are often endorsed by celebrities. In 2015, the Consumer Financial Protection Bureau looked at many of the ads and determined that important information was missing, inaccurate or obscured in fine print. As part of its study, the agency met with older homeowners, showed them sample ads, and then gauged their thoughts and impressions of reverse mortgages.

A key finding was that some people interpreted claims like “you can live in your home as long as you want” and “you still own your home” to mean they couldn’t lose their home if they took out a reverse mortgage. In fact, borrowers can lose their home if they don’t keep up with property taxes and insurance or run afoul of other loan requirements. Some people thought the federal government provided the money as a benefit to seniors and the loan didn’t have to be repaid, or that it was interest-free.

The BBB recommends you carefully evaluate the pros and cons before taking out a reverse mortgage. Pros include no monthly payments and no credit requirements, but you do have to undergo a financial assessment to be sure you can pay the taxes and insurance over the life of the loan. A 2010 study found that 10 percent of reverse mortgage borrowers were in default because they couldn’t pay taxes and insurance.

Cons include:

• A balance that increases over time with the accumulation of interest and fees that could ultimately exceed the value of the home. Neither you nor your estate will be responsible for the excess.
• If your heirs would like to keep your home instead of selling it, the loan must be paid off with another source of funds. But they won’t have to pay more than the full loan balance or 95 percent of the home’s appraised value, whichever is less.
• Fees are usually higher than with a traditional mortgage.
• The loan will become due when the last surviving borrower (or in some cases a non-borrower spouse) vacates the property for an extended period of time. The time frame varies depending on whether it’s for a medical or non-medical reason.
• You may outlive the proceeds of the loan and be left with little or no financial resources later in life.

Randy Hutchinson is the president of the Better Business Bureau of the Mid-South. Reach him at 901-757-8607.