Perhaps you’ve seen Tom Selleck on a daytime TV ad addressing seniors directly, or maybe you’ve only heard the term involved in lawsuits. But what is a reverse mortgage really?
A brief summary of the reverse mortgage.
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is only available to homeowners 62 and older. The terms can vary wildly, but it all comes down to equity.
Equity is the amount your property is worth today minus what you’ve already paid. Therefore, equity in your home grows as you make payments. In a reverse mortgage, you borrow against your own equity. Advertisements will often portray this process as the banks “giving you money”. The bank will in fact give you back the money you put into the house as tax-free income.
The bank defers repayment of the loan and its interest until the buyer dies or sells the home. Once owners pass away, it is up to surviving heirs to repay the loan. More often than not, people have to sell the home in order to repay the debts and accrued income.
On balance, the concept of a reverse mortgage seems straightforward. However, there are a few things to look out for before taking out this type of loan.
Fees and Interest
Reverse mortgages reflect the reality of a regular mortgage– you’ll pay fees, closing costs, and insurance premiums. For average home buyers, they will make payments each month to pay down the loan. On the contrary, a reverse mortgage cannot be paid down. In fact, the amount owed compounds month after month.
Paying it back
Say you pass away and your heir wants to live in the house. The heir has to pay back the loan or sell the home, even if he or she already lives there.
Say you need to move out of your home. For example, if you move to a nursing home for assisted care. A move like this will trigger repayment, and you’ll only have a year to close the loan.
The big push
Actors, congresspeople and “experts” will appear on TV making incomplete statements about these loans. One popular advertisement refers to the income as “tax free” and specifically identifies reverse mortgages as “programs”. While these statements are not entirely false, they are purposefully misleading the target audience.
The Consumer Financial Protection Bureau (CFPB) is taking action against these ads. You can read more about the risks and your rights on their website.
A reverse mortgage isn’t the right idea for everyone. If any of these mitigating factors apply to you, you might consider lower-cost options for retirement spending.
We can help.
Consumer protection laws and regulations still apply to reverse mortgages. Section Z of the Truth in Lending Act (TILA) requires the lender to disclose the total actual cost of the loan, the total annual costs, and a breakdown of associated fees.
Maginnis Law understands the complexities of a reverse mortgage and its effects. If you or someone you know have been the victim of a misleading reverse mortgage agreement, we can help. Contact our consumer protection attorneys today for more information. Call us at (919) 526-0450, email us at info@MaginnisHoward.com, or use our contact form.