National Consumer Protection, Part 5: Reverse Mortgages

A reverse mortgage is a special type of home loan that lets you convert a portion (or all) of the equity in your home into cash. Only people over age 62 or older can get a reverse mortgage. The difference between a reverse mortgage and a traditional home loan – is that borrowers don’t have to pay it back.

How do reverse mortgages work?

When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you.

Seniors considering a reverse mortgage are led to believe that they will never have to make a mortgage payment ever again and that is true. The catch, however, is that reverse mortgages still require homeowners to pay their property taxes, homeowner’s insurance, and homeowner’s association assessments. These requirements are generally glossed over in commercials or buried in the fine print of loan contracts. Making matters worse, reverse mortgages are not set up to where homeowners can make monthly payments into an escrow account to cover these types of expenses, like they would in a traditional home loan. As such, these loans end up working like a trap, with promises of no monthly payments that only set aging homeowners up for failure and foreclosure down the road.

Here are some tips for seniors considering a reverse mortgage:

Shopping for a reverse mortgage

If you’re considering a reverse mortgage, shop around. Decide which type of reverse mortgage might be right for you. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. Make a list and ask lots of questions to make sure a reverse mortgage is the best option for you and that you’re getting the right kind.

Example:

• Do you want a reverse mortgage to pay for home repairs or property taxes? If so, find out if you qualify for any low-cost single purpose loans in your area. Staff at your local Area Agency on Aging may know about the programs in your area. Find the nearest agency on aging at eldercare.gov, or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs, and how to apply.

There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).

For more information about types of reverse mortgages, see the FTC’s Reverse Mortgage Information.

Be wary of sales pitches for a reverse mortgage

Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help.

**** A salesperson isn’t likely to be the best guide for what works for you. This may not be true 100% of the time, but it is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.

The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal – walk away. Do some research and find a counselor or company you feel comfortable with.

You have a right to cancel

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.

Make sure to report possible fraud

If you suspect a scam, or that someone involved in the transaction may be breaking the law, let the counselor, lender, or loan servicer know. Then, file a complaint with the Federal Trade Commission and Texas Office of the Attorney General.

Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives.

The following organizations have more information:

Lone Star Legal Aid is a 501(c)(3) nonprofit law firm focused on advocacy on behalf of low-income and underserved populations. Lone Star Legal Aid serves millions of people at 125% of federal poverty guidelines that reside in 72 counties in the eastern and Gulf Coast regions of Texas, and 4 counties of southwest Arkansas. Lone Star Legal Aid focuses its resources on maintaining, enhancing, and protecting income and economic stability; preserving housing; improving outcomes for children; establishing and sustaining family safety and stability, health and well‐being; and assisting populations with special vulnerabilities, like those who have disabilities, or who are elderly, homeless, or have limited English language skills. To learn more about Lone Star Legal Aid, visit our website at www.lonestarlegal.org.

Media contact: Clarissa Ayala, cayala@lonestarlegal.org