“Don’t sign anything you don’t understand,” says Amy Mix, supervising attorney for the Legal Counsel for the Elderly, an affiliate of AARP.
Odette Williamson, staff attorney for the National Consumer Law Center, agrees. “This is a complicated financial product,” she says. “I would absolutely make sure I understand it and the increasing balance aspect of it.”
“And if you see a lender in their ad or marketing not being clear, trying to imply that it’s free money or that it’s government money, I would stay away from those,” she says.
“Really read the fine print,” says Ruth Susswein, deputy director of national priorities for Consumer Action. And get help understanding it from an outside, or neutral, party, if you need it.
Otherwise, “you may not realize how much it’s costing you because the costs are rolled into the loan,” she says.
It’s your home, but you’re not named as a borrower
A reverse mortgage loan generally comes due when the last borrower on the loan dies or moves from the residence. At that time, the lender takes the home to satisfy the loan.
But if you and your spouse take out a reverse mortgage loan and one of you is not included on the loan, it could present a problem. Namely, if the borrowing spouse dies or exits the home, it’s ultimately up to the lender and the loan servicer whether the other spouse can stay in the home.
With reverse mortgage loans, the older you are, the more of your equity you can borrow. In the past, couples would sometimes opt for a strategy of leaving the younger spouse off the loan.
But now rules require that lenders calculate loans based on the ages of both spouses, no matter who is named as borrower on the loan, Williamson says.
“For new mortgages, the incentive to keep the spouse off is gone,” says Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Spouses should make sure they’re on.”
One important question to ask yourself: Whose idea was it to get a reverse mortgage loan?
Always be extra wary if the lender approaches you, says Mix with Legal Counsel for the Elderly.
Another warning sign: pressure or a sense of urgency.
“If someone comes on very hard to sell you a reverse mortgage loan, I would take that as a warning sign,” says Barry Zigas, director of housing policy for the Consumer Federation of America.
And once you do approach lenders, you’re still entitled to take your time. You also can walk away.
“If it seems to be too good to be true, ask more questions,” Mix says.
Another bad sign is pressure from a third party, whether it’s a family member or a company trying to sell you home renovations or repairs, says Amy Ford, director of home equity initiatives for the National Council on Aging. That’s definitely a time to step back and think things through.
“Who in the client’s life has a vested interest (versus) who is being pushy?” she says.
If a reverse mortgage loan wasn’t your idea, “it might be a good idea” to take a step back and think things through, Ford says.
“There is a time and a place that reverse mortgage loans can be very helpful to people,” Mix says. But you have “to know what your obligations are.”
With a reverse mortgage loan, you’re required to stay current on property taxes, insurance and maintenance. But sometimes a borrower and lender have different ideas of exactly what that means.
With property and flood insurance, lenders can require you to increase coverage amounts during the life of your loan. “It’s an additional cost that a lot of adults on fixed incomes can’t afford,” Williamson says.
A few questions to ask:
Who will pay your property taxes, as well as how and when? “Be clear about how that will be done,” Consumer Federation of America’s Zigas says.
What happens if you need to take advantage of a deferral for property taxes? While the local jurisdiction might be willing to postpone the bill, your lender or servicer may not.
How and when will the lender require you to certify annually that you still live in the house? When will these requests be sent, what will you need in response, and who will you need to contact if you don’t receive the requests?
If your property insurance increases, do you have the resources to pay for it?
“Reverse mortgage loans are often sold as a way of taking money out of your home and using it to invest in annuities or some other investment,” Zigas says.
“It can often be a terrible deal for consumers because of the interest charged,” he says. Consumers are moving money from one place to another with fees on both sides.
Add to that, that “you’re basically gambling your equity,” Zigas says.
What you need to know is that with reverse mortgage loans, there’s a firewall between companies that make the loans and those asking you to reinvest the proceeds, Williamson says.
The 2008 HERA (Housing and Economic Recovery Act) amendment spells out that there should be “no involvement with or incentive” to provide a borrower with insurance or investment products, Williamson says. And lenders can’t require you to buy or invest in anything as a condition for approval of the loan.
If a lender or anyone else is pushing you to reinvest the proceeds from your loan, don’t do it.
“For seniors who find themselves with limited income and (abundant) equity, it can be effective,” Zigas says.
But sometimes the math just doesn’t work. You may not have enough equity in the home to make a reverse mortgage loan worthwhile, especially once you calculate the loan costs and your current expenses.
“Plan long term,” Williamson says. “What are your basic needs and will this loan support those?”
What problem are you using the reverse mortgage loan to solve?
National Council on Aging’s Ford says if it’s something like an income gap or a cash-flow problem, there might be other solutions.
One place to look: BenefitsCheck.org, a database of more than 2,000 federal, state and private benefit programs, she says.
Legal Counsel for the Elderly’s Mix says if you’re already receiving benefits, you want to look at how the cash flow from a reverse mortgage loan can affect those. “The way you structure payments can affect benefits,” she says.
Since the aim is to give you more money (and options), you want to make sure you’re not giving up cash flow in return.
Shopping for a reverse mortgage loan is like anything else: You want to compare a few different options.
“We advise consumers to shop around,” says Lori Trawinski, director of banking and finance for the AARP Public Policy Institute.
Go through the housing counseling required for reverse mortgage loan borrowers, ask questions and make sure you understand the terms of the loan, Trawinski says.
Trawinski also recommends talking to someone like an elder law attorney or certified financial planner who’s not connected to the transaction or any of the parties involved. Ask the opinion “of someone who’s not benefiting from whether or not you participate in the loan,” she says.