The spring issue of the Federal Deposit Insurance Corporation’s Consumer News includes a section on understanding the risks and costs of a reverse mortgage. Produced quarterly by the FDIC Office of Public Affairs in cooperation with other Divisions and Offices, the publication is intended to present information in a nontechnical way for consumers.
In Advice for Seniors: Understand the Risks and Costs of Borrowing With a Reverse Mortgage, the FDIC says a reverse mortgage is often advertised as a great source of easy money for older homeowners to supplement their income, pay healthcare expenses or use the money as they please. However, the FDIC says that reverse mortgages may not be the best option for everyone.
“Not all advertisements clearly indicate that a reverse mortgage is a loan,” said Mira Marshall, an FDIC Section Chief specializing in consumer issues. “In fact, a reverse mortgage is a very complicated loan that uses home equity as collateral, just like the mortgage you probably used to purchase your home.”
The article addresses basic information about the product and to consider whether or not you or your heirs want to keep the house.
“Because the costs and fees can be extremely high,” said Mike Evans, an FDIC Fair Lending Specialist, “most experts generally advise homeowners not to take out a reverse mortgage if they plan to stay in their home less than five years or if they simply need extra money for small expenses.”
If you decide that borrowing money is the way to go, contact several lenders and compare the costs and benefits of the options they offer said the FDIC. They also address using funds to purchase another financial product.
“Most financial experts also agree that it is never a good idea to use the funds from a reverse mortgage to purchase other financial products or services,” added David Lafleur, an FDIC Senior Examination Specialist. “Not only will you immediately incur expensive interest charges and other fees in connection with the reverse mortgage, but having large deposits or annuities may make it tougher for you to qualify for certain entitlement programs that take assets into consideration, such as Medicaid. Also, if you tie up money in CDs or annuities, you will be giving up easy access to funds you may need to meet your expenses.”
The spring 2010 issue of FDIC Consumer News also includes eight ways to avoid problems including increases in rates and fees and reductions in credit limits. Other articles discuss questions to ask before depositing money through an “agent” or broker instead of directly with a bank.