The Consumer Financial Protection Bureau recently took action against three reverse mortgage companies for deceptive advertisements, including claiming that consumers could not lose their homes. It’s another reminder that reverse mortgages — which take part of the equity in your home and convert it into payments to you — are complicated. Misunderstandings can be costly.
Know the facts: Allen Shayanfekr, CEO of Great Neck’s Sharestates, an online crowdfunding platform for real estate financing, points out that interest rates on reverse mortgages are higher than on a traditional mortgage, and the eventual payoff of the mortgage will be a lot higher than the total of payments you receive because of the loan’s structure.
Remember that those monthly proceeds are borrowed funds, not income. “Make sure certain public assistance programs, like Medicaid, aren’t affected if you access funds from a reverse mortgage,” says Steven Klein, reverse mortgage director at AmCap Mortgage in Greenville, South Carolina.
It’s not only about you: “If you’re a parent with adult children and are considering a reverse mortgage, sit down with them and discuss this. Your children may see your home as part of their inheritance; a reverse mortgage can change that,” explains Tim Manni, a mortgage expert with NerdWallet.com.
When the borrower dies, typically heirs have up to one year to pay off the loan. Heirs can sell the house and use the proceeds to pay off the reverse mortgage, but that means a spouse or other relatives living in the home will be forced out, cautions Harrine Freeman, CEO of H.E. Freeman Enterprises in Washington, D.C.