The Financial Industry Regulatory Authority (FINRA) describes its stance on reverse mortgages in a report titled, “Reverse Mortgages: Avoiding a Reversal of Fortune.” While that title has negative connotations, it doesn’t explain that the contents of the report have evolved over the past several years, even if its title may not have.
This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services, in a piece at Forbes.
“[The report] used to tell investors to consider reverse mortgages only as a last-resort option,” Pfau explains. “But after Barry Sacks published his research [about reverse mortgages in 2012], he convinced FINRA to remove that language.”
The current version of FINRA’s report offers three reasons to maintain a cautious posture regarding reverse mortgages, Pfau says. First, FINRA warns potential borrowers not to look at a reverse mortgage as potentially “free money,” citing the upfront costs associated with actually getting a reverse mortgage transaction off the ground.
Second, the report says that the reverse mortgage must be the primary mortgage on the home, Pfau describes.
“This is not really a reason to be cautious, but the report points out that after paying off an existing mortgage from the initial principal limit, borrowers may have less access to cash than they had anticipated,” says Pfau.
The report also reminds investors that they remain responsible for property taxes, homeowners’ insurance, and maintenance costs, in addition to reminding them that the loan becomes due should they decide to move out of the property being borrowed against.
“With accumulated interest, borrowers might be surprised about the amount of home equity that they have left after repaying the loan,” Pfau writes.
Additional tips from FINRA are also included, such as a potential borrower weighing all of their financial options before engaging in the loan, having a clear picture of all the associated costs and fees, and obtaining independent advice through counseling.
While one of the tips from FINRA advises those who want to leave their home to their heirs to potentially steer clear of a reverse mortgage, Pfau takes issue with some of the language the organization uses.
“This language probably should also have been removed following the implications of Barry Sacks’s research,” Pfau writes. “Since money is fungible, the report’s statement is wrong when coordinated strategies can create synergies for the investment portfolio to manage sequence risk that leads to a larger overall legacy after repaying any loan balance.”
Read the full article at Forbes, sourced from Pfau’s book “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.”