Buying into homeownership is already challenging enough for many Americans, but keeping — and maintaining — a home can come with serious challenges as a person gets older. This may lead an older homeowner to consider a product like a reverse mortgage, but potential borrowers should be aware of the product’s details and the informational resources they can access.
This is according to Deborah Royster, an assistant director in the Office of Older Americans at the Consumer Financial Protection Bureau (CFPB), who spoke about these issues in an episode of the “Your Money Briefing” podcast from The Wall Street Journal.
Discussing the product in broad strokes to inform people who may not be aware of them, Royster explains the basic mechanics of reverse mortgage eligibility, obligations and costs. She said that reverse mortgages can be expensive, which is why the product should be considered in concert with other options.
“There are no monthly payments, but interest and fees are added to the loan balance each month,” she said. “So, in contrast to a forward mortgage, the loan balance with a reverse mortgage goes up, not down, over time. So, as the loan balance increases, your home equity decreases.”
The CFPB advises that upfront fees can be “as much as $6,000 plus closing costs in an initial mortgage insurance premium,” in addition to an annual mortgage insurance premium and obligations related to property taxes and homeowners insurance. But bad actors may also attempt to use the pretense of a reverse mortgage offering to a potential scam victim.
“Sometimes an older consumer is presented with a ‘you-can’t-miss’ sort of investment opportunity, where they’re encouraged to take out a reverse mortgage, or there are also scams where older consumers are encouraged to take out reverse mortgages to pay for high-cost repairs or improvements to your home,” Royster said. “There, scammers try to convince the reverse mortgage borrower to sign a power of attorney that gives the scammer sole access to the reverse mortgage loan proceeds.”
The best way for a borrower to arm themselves is with good information. Royster encourages anyone considering a reverse mortgage to avail themselves of resources offered by the U.S. Department of Housing and Urban Development (HUD).
“One important source of information would be housing counselors from [HUD],” she said. “They have quite a bit of experience, knowledge about these products and can certainly advise consumers. In addition, if a consumer has concerns or questions about a reverse mortgage, a loan product, they have a complaint about an issue they’ve encountered, they could also file a complaint with the CFPB.”
Royster said that for a senior homeowner seeking access to additional cash, there is no one right solution for all. A reverse mortgage could be part of a solution, but she reiterates the need to consider multiple options.
“Each of us has to think about our own personal circumstances,” she said. “They can look at other ways to lower expenses. They can also look at other home equity options that may be possible to them, such as a home equity loan or refinancing. You can sell your home. You can downsize your home.”
But if a reverse mortgage is considered the best fit, Royster offered some parting advice for those seeking it out.
“If you do decide you need a reverse mortgage, wait as long as possible before obtaining one so that you limit the amount of time that you have a loan and you’re incurring these additional expenses,” she said.
