Reverse mortgages are gaining steam again, as more home owners 62 and older look to borrow against their home’s equity.
But the Consumer Financial Protection Bureau warns in a new report that reverse mortgages aren’t being used as they were originally intended by lawmakers. The watchdog group also says that these complex mortgages are confusing seniors who don’t fully understand the risks involved, and ultimately that misunderstanding could cost them their homes if they’re not careful.
“People are quite confused about reverse mortgages,” says Hubert Humphrey III, who heads the CFPB’s Office of Older Americans. “People need to better understand reverse mortgages. What is the best way to use them? What are the risks and what are the costs associated with it?”
One of the main points of confusion, the report finds, is that many home owners don’t even view reverse mortgages as a loan but as a way to get money out of their homes. However, reverse mortgages have monthly interest charges, fees, and other costs. These payments are added to the loan balance, which “over time the home equity decreases while the loan balance increases,” MSNBC.com reports.
The report says that these loans have changed quite a bit in the last few years. Reverse mortgages used to be mostly adjustable-rate loans, in which seniors could get money out of their homes by choosing monthly payments to cover everyday expenses or a line of credit for major expenses, or even a combination of the two. The report says that 70 percent of these loans now are fixed-rate and have a lump-sum payment.
“You take out that loan and get all of the money instantly,” Humphrey says. “And yet you have all of your life left to live and you may not have the resources you need when you really need it.”
A growing number of home owners who take out reverse mortgages are at risk of foreclosure because they are failing to pay taxes and insurance, the report shows.
The CFPB is considering recommending new federal regulations to reverse mortgages. You can find more information about reverse mortgages at its ASK CFPB database, fact sheet, or consumer guide.