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Beware Ads for Reverse Mortgages

New report finds flood of mailings targeted potentially vulnerable older homeowners

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The growing volume of direct mail advertisements for reverse mortgages sent out during the pandemic, when home prices surged and interest rates were miniscule, disproportionately targeted older low-income homeowners who wouldn't necessarily benefit from the complicated home loans, warns the Consumer Financial Protection Bureau (CFPB) in a new report. 

How reverse mortgages work

Reverse mortgages can be a good source of retirement income for some older homeowners who are house rich but cash poor. You tap the equity of your home and use the cash — received as monthly payments or a lump sum, or through a line of credit — to help cover living expenses, provided you have at least 50 percent of your home’s value paid off. At least one borrower must be 62 or older to qualify for a reverse mortgage.

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Unlike a traditional mortgage, in which a borrower pays back a home loan in monthly installments, a reverse mortgage typically doesn’t need to be paid back until after you move or die. However, interest and fees will increase the size of the loan over time — and the fees can be considerable, especially if the reverse mortgage is refinanced. The homeowner also runs the risk of the loan coming due if he or she doesn’t keep making payments for insurance and taxes, or stops maintaining the property.

If you’ve received a sales pitch in the mail for a reverse mortgage — or for refinancing your current one — you’re not alone. Mailings for reverse mortgages shot up to 44 million in 2021 and 48 million in 2022, compared with an average 11 million in 2019 and 2020. Mail ads for refinancing reverse mortgages also grew, as companies pitched then-low mortgage rates and high home prices to those who had already taken out a reverse mortgage. (Mortgage rates, after years of sitting at rock-bottom levels, have shot up since the Federal Reserve started raising interest rates in March 2022 to combat inflation.) The CFPB’s study looked at direct-mail reverse mortgage pitches from January 2016 through December 2022.

Nearly three-quarters of the pitches in 2021 and 2022 went to households with less than $75,000 in income, the CFPB says. And 83 percent of those solicitations went to homeowners in the South and West, where reverse mortgage lending is concentrated, and where about 62 percent of low-income seniors live.

That’s a worrisome finding, according to the CFPB report. More older homeowners in the South and West report struggling to keep up with everyday expenses and make mortgage payments on time than do homeowners in other regions. Older homeowners in the South are also more likely to have credit card and medical debt.

“The findings suggest that reverse mortgage advertising during the COVID-19 pandemic, when home prices surged and interest rates fell, focused on many older homeowners with high equity and lower incomes, and in regions where homeowners have somewhat less ability to stay current on their housing payments,” the CFPB report found.

Be wary

Reverse mortgages are indeed designed to be helpful for certain people with low incomes but high equity in their homes. Nevertheless, the CFPB says that the huge increase in direct mail advertising for reverse mortgages during the COVID-19 pandemic was “potentially targeting vulnerable populations with an expensive product that may not be best suited for their individual housing and financial needs.”

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What can go wrong? In the worst case, you are forced to sell your home to repay the loan if you don’t keep up with taxes, insurance and upkeep. You could also wind up paying big fees that reduce the size of your home equity faster than you had thought. A reverse mortgage can also impact the ability to leave your home to heirs.

If you are considering a reverse mortgage, experts say to beware of brokers or lenders who: 

  • Use high-pressure tactics to talk you into the loan.
  • Claim the reverse mortgage is safe because it’s insured by the federal government. The Federal Housing Administration (FHA) does insure some reverse mortgages, but that coverage doesn’t protect the borrower; it’s for the lender, in case of default.
  • Don’t disclose the fees, conditions and risks that come with taking out a reverse mortgage, including the possible loss of the home, which serves as collateral.
  • Suggest taking out a reverse mortgage to pay for renovations or repairs.
  • Require buying investments, such as annuities, to get a reverse mortgage.

Before you borrow

The FHA requires you to go to an educational session with a counselor approved by the Department of Housing and Urban Development (HUD). Take advantage of the counseling, and don’t be rushed into signing any paperwork until you understand the terms of the loan. Consult a trusted family member, friend or financial adviser.

Finally, if you have significant equity in your home but are struggling to make ends meet, consider alternatives to a reverse mortgage, including a home equity loan or home equity line of credit (HELOC). Both types of home loans tap into your built-up equity but may offer more favorable terms than a reverse mortgage. Also consider downsizing to a more affordable home or even getting a roommate to offset some living expenses.

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