Seniors watch a third more TV than other adults, and every time they turn on the set there’s a good chance they’ll see an ad for reverse mortgages. As healthy-looking retirees ride bikes or play golf, an older actor will explain that reverse mortgages can be a great way for retired homeowners to get some extra spending money. And it’s true: Reverse mortgages can be a valuable tool for retirees.
They’re also complicated, with risks that seniors may not expect. According to a new study by the Consumer Financial Protection Bureau, all those ads are adding to the confusion.
A reverse mortgage is a loan taken against the equity in your home. Unlike a home-equity line of credit, which can be yanked away by the bank, a reverse mortgage doesn’t need to be paid back until the homeowner dies or moves out.
As baby boomers retire, they’re likely to need some extra financial help. About half of all Americans age 55 and older have no investments at all, the Government Accountability Office said in a report issued this week. At 55 to 64, the median American household with savings has only about $104,000, enough to buy an inflation-protected annuity of just $310 a month.
Other than Social Security, the last financial resort for many retirees is the value of their home, and about three-quarters of seniors do own their own home. Reverse mortgages can seem like an easy, risk-free way to tap this asset. Only about 2 percent of eligible homeowners take out reverse mortgages, but that number is expected to rise as more and more boomers retire. There are about 628,000 reverse mortgages outstanding.
The CFPB showed reverse mortgage advertisements to focus groups of homeowners 62 and older. After watching the ads, some viewers didn’t realize that reverse mortgages are loans, with compounding interest and fees that can be as much as 4 percent to 8 percent of the total loan. Others were confused by references to government backing. The Federal Housing Administration does offer insurance to the banks that sell reverse mortgages, but they’re not in any way a government program.
Finally, the ads give viewers the impression that reverse mortgages let homeowners stay in their house for the rest of their lives. The product can make this easier: Homeowners don’t need to pay back their loan or any interest until they move out. But it’s still quite possible for a bank to foreclose on a reverse mortgage. While homeowners don’t need to make loan payments, they do need to pay property taxes, insurance, maintenance, and homeowner association fees. If not, the bank can take the home. Almost 12 percent of reverse mortgage borrowers are in default on their property taxes or homeowners insurance, a study found in January.
Foreclosures may be likeliest for homeowners who take out reverse mortgages younger. A retiree can tap her equity in her 60s and then use up all that equity if she lives longer than expected. Without the means to pay for the upkeep of her home, she could get kicked out in her 80s or 90s.
In a late-in-life financial emergency, a reverse mortgage can come to the rescue. But it takes more than a minute-long ad to understand how it works.