A reverse mortgage can be thought of as similar to a conventional mortgage, but where the “roles are switched,” according to a new column at Forbes.
They’re best suited for seniors encountering mounting costs late in life and those without heirs, and are not well-suited for those who hope to leave their home to an heir or who have outside savings or life insurance that can help cover late-life expenses. This is according to Dock David Treece, member of the Financial Industry Regulatory Authority (FINRA)’s small firm advisory board in the column.
“In the end, most reverse mortgage loans are not repaid by the borrower,” Treece explains in the column. “Instead, when the borrower moves or dies, the borrower’s heirs sell the property in order to pay off the loan. The borrower (or their estate) gets any excess proceeds from the sale.”
Since proprietary reverse mortgage options are not sponsored by the federal government, they are more likely to result in negative outcomes, Treece contends.
“Most reverse mortgages are issued through government-insured programs that have strict rules and lending standards,” he says. “There are also private, or proprietary, reverse mortgages, which are issued by private non-bank lenders, but those are less regulated and have an increased likelihood of being scams.”
On top of going over the typical qualifications regarding age and ownership status of the home, Treece also explains the types of properties that are eligible for a Home Equity Conversion Mortgage (HECM).
“Eligible properties include single-family homes; multi-unit properties with up to four units; manufactured homes built after June 1976; and condos or townhomes,” he writes.
While the loans make sense for some, there are reasons to avoid them, he says.
“Reverse mortgages aren’t good for everyone. Only certain borrowers qualify, but their structure also only makes them appropriate for certain borrowers,” he says. “While there are some cases where reverse mortgages can be helpful, there are lots of reasons to avoid them.”
Readers are also warned to be wary of some of the advertising from companies offering reverse mortgages, since they come from private companies, Treece writes.
“Government-backed reverse mortgages are generally very safe,” he says. “But many of the ads that consumers see are for reverse mortgages from private companies. When working with a private lender—or even a private company that claims to broker government loans—it’s important for borrowers to be careful.”
Read the article at Forbes.