FINRA’s Position on Reverse Mortgages

Initially, a reverse mortgage can sound like free money. Based on how much home equity you have, your lender gives you a loan amount, for which you don’t have to make any monthly payments. A good deal, yes? Well, yes and no. A reverse mortgage can be a good financial tool if you make prudent use of the loan, according to the Financial Industry Regulatory Authority (FINRA). 

What Is a Reverse Mortgage?

With a traditional mortgage, borrowers receive a loan amount, which they repay over time through monthly payments. With a reverse mortgage, borrowers receive a loan amount, which they may receive as a lump sum, a series of regular monthly payouts, or a line of credit. The most common form of reverse mortgage is a home equity conversion mortgage (HECM), which is backed by the Federal Housing Administration (FHA). Borrowers must be age 62 or older to qualify for one.

The loan balance for a reverse mortgage must be repaid when the borrower no longer lives full time in the home, which must be their principal residence. This could be due to the borrower selling the home, moving out for at least 12 months (say, into a nursing home), or dying. In many instances, the borrower or their heir(s) sells the home to pay off the reverse mortgage loan balance. 

What Does FINRA Say About Reverse Mortgages?

While FINRA acknowledges that a reverse mortgage can help some homeowners remain in their home, the organization also urges homeowners to learn all the details of a reverse mortgage and weigh their options, so they can make an informed decision on how to proceed.

FINRA makes a point of warning homeowners that a reverse mortgage is not free money. As with traditional mortgages, the loan amount for a reverse mortgage will accrue interest over the life of the loan. As such, when it’s time to repay a reverse mortgage, the borrower or their heirs may have to pay more than the original loan amount. 

FINRA also alerts homeowners that reverse mortgages come with fees and costs that can be significantly higher than with a traditional mortgage—sometimes as much as 4% to 8% of the total loan amount. As with a traditional mortgage, these fees and costs can be rolled into the total loan amount, reducing how much money you actually receive from the reverse mortgage. In addition, for homeowners who have an existing mortgage, the proceeds from a reverse mortgage will be used first to pay off that mortgage, which could leave the borrower with much less cash than expected. 

Another aspect to reverse mortgages is that there are certain requirements that borrowers must meet to keep their reverse mortgage from defaulting and entering foreclosure proceedings. These include:

• Paying all property taxes and insurance—such as homeowners, flood, hazard, wind, or condo—on time
• Paying related expenses, such as homeowners association fees and ground rents, on time
• Maintaining the home so that it remains in good condition
  

Consider If and Why You May Need a Reverse Mortgage

Many financial professionals and mortgage lenders recommend a reverse mortgage as a way to live a comfortable retirement—and it might be—but FINRA warns homeowners to review their financial circumstances and assets carefully before making a decision.

A FINRA Investor Alert titled “Reverse Mortgages: Avoiding a Reversal of Fortune” offers the following tips to homeowners considering a reverse mortgage (Investor Alerts are only available from FINRA through a free email subscription service):

• Review and weigh all options—If you’re looking for extra cash, are there better ways to get it than a reverse mortgage? Can you qualify for a home equity loan or a home equity line of credit (HELOC)? Can you sell the home and downsize? Are there local, state, and federal programs to help you pay your taxes and bills? 
  
• Understand the risk and know all of the fees and costs—It’s important to find out before taking out a reverse mortgage how much it will cost you if you have to pay it back. This includes knowing the interest rate, all costs and fees, and the amount of any prepayment penalty. 
  
• Know how a reverse mortgage could impact your financial eligibility—While a reverse mortgage does not impact your Social Security benefits or Medicare eligibility, it could affect Medicaid and Supplemental Security Income (SSI) eligibility. It also may be relevant to any assistance or protection that you might receive if you have to enter a nursing home. 
  
• Talk with a professional—While the U.S. Department of Housing and Urban Development (HUD) requires all borrowers who apply for a reverse mortgage to talk with a HUD-approved counselor, it’s important to speak with others outside the transaction for an independent opinion. This could include an estate planning attorney, a certified public accountant (CPA), or a trusted financial advisor. 
  
• Think twice before using a reverse mortgage for investment purposes—Using a reverse mortgage as an investment or to fund an investment is a risky proposition at best, so FINRA cautions against taking that step. 
  

The Bottom Line

A reverse mortgage could be an effective financial tool to help older homeowners stay in their homes and pay their living expenses. However, it may not be the best option, so FINRA advises homeowners to do their own research into the full details and costs of a reverse mortgage and examine alternatives before making a decision on whether it is the right choice for them.