Potential borrowers should know all of the facts before getting a reverse mortgage, and a recent podcast from the Financial Industry Regulatory Authority (FINRA) clears up some common misconceptions associated with the product.
The podcast discusses several key considerations for consumers when seeing advertisements for reverse mortgages, referring to the results of a focus group study released in June by the Consumer Financial Protection Bureau (CFPB). The focus of the FINRA podcast, however, took more of an educational stance to inform prospective borrowers about reverse mortgage facts.
“Reverse mortgages aren’t free money and misusing or misunderstanding them can jeopardize your financial future,” said Bud Schneeweis, director of the Military Financial Readiness Project at FINRA, during the podcast.
Schneeweis then goes on to address some common misunderstandings about reverse mortgages, including that a reverse mortgage is a loan and not a government benefit.
“It’s actually an interest-bearing loan secured by the equity in your home,” he said. “Like a home equity loan, a reverse mortgage allows you to convert your home equity to cash that you cash use for any purpose, and there are fees and compounding interest that must be repaid.”
Another fact to consider is, according to Schneeweis, is just because you take out a reverse mortgage does not mean that you can’t lose your home.
“In reality, foreclosure could happen if you fail to meet the obligations of your loan like keeping up to date on your property taxes, home maintenance and insurance costs, or if you leave your home for an extended period of time,” he said.
Third, Scneeweis suggests that interested borrowers should carefully consider when might be the right time for them to get a reverse mortgage and how the loan will fit into their financial planning strategy.
“If a reverse mortgage is part of your financial plan, do your best to determine in advance how you expect to use the money from the loan,” Schneeweis said. “And be realistic about the kind of lifestyle a reverse mortgage will help you support or sustain.”
This is not the first time FINRA has recognized reverse mortgages. In January 2014, the independent, not-for-profit organization removed a statement from its published investor alert that previously stated reverse mortgages should be used as a product of “last resort.”
Listen to the FINRA podcast.
Written by Jason Oliva