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The best way to understand a reverse mortgage is to ignore the “reverse” and focus on the “mortgage” - because that’s all it is - a mortgage. As with any mortgage, you retain title to the deed. Because you still own the house, you also remain responsible for property taxes, insurance, and maintenance. Consequently, you must prove you have the resources to pay those expenses. If you can’t, part of the loan proceeds may be set aside to take care of them.
You also need to own your home outright or have a mortgage balance low enough that it can be paid off with the proceeds of a reverse mortgage. If you have bad credit, you’ll need to explain it to the lender who will determine whether your explanation qualifies as an extenuating circumstance.
The proceeds from the mortgage, as with any money you borrow, are tax-free and you can get the money in several ways:
- Fixed monthly payments over a specific number of months.
- Fixed monthly payments for life, or as long as you live in the home.
- A line of credit you draw on as often as you want in whatever amounts you’d like.
- A combination of monthly payments and line of credit.
Although you may be receiving checks in the mail, don’t forget that you are also accruing interest, and that the unpaid interest is increasing the size of the loan.
Once you get a reverse mortgage, you can repay it at anytime, but it must be repaid when you die or when the home ceases to be your permanent residence. If you or your heirs can’t repay the loan, your home goes to the lender.
Reverse mortgages typically have higher fees than regular mortgages - a fact that sometimes gets forgotten by mortgage sellers. According to the Consumer Financial Protection Bureau (CFPB), some advertisers for reverse mortgages give consumers the wrong impression. After seeing the ads, the CFPB claims they were characterized by:
- Ambiguity about reverse mortgages being loans: Some study participants didn’t understand that reverse mortgages are loans, complete with fees and compounding interest. Most ads either included interest rates only in the fine print or didn’t include them at all.
- False impressions of affiliation with the government: Some study participants believed that reverse mortgages were a government benefit and that the federal government provided consumer protections for reverse mortgage borrowers.
- Difficult-to-read fine print.
- Celebrity endorsements implying reliability: Many ads employed celebrities widely seen as trustworthy. These endorsers extolled the benefits of reverse mortgages without mentioning the risks. One study participant said, “When it’s a former congressman endorsing it, it makes it sound like a good idea".
- False impressions about staying in the home for the rest of your life: Many ads implied that a reverse mortgage borrower would be financially secure for the rest of his or her life. However, a reverse mortgage is not a guarantee of financial security - if the borrower taps into the equity too early and runs out of funds, or fails to pay the taxes and upkeep, it could lead to foreclosure.
Most advertisements reviewed in the study failed to mention those consequences, according to the CFPB.
While reverse mortgages can be life savers for some people, they can be disastrous for others. If you are considering one for you or a loved one, please contact us and get the facts as well as information on possible alternatives.
The agency’s consumer advisory on reverse mortgage advertisements can be found here: The Truth about Reverse Mortgage Advertising
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