FINRA’s Position on Reverse Mortgages

Initially, a reverse mortgage tin sound for illustration free money. Based connected nan magnitude of home equity you have, your lender gives you a indebtedness amount, for which you don’t person to make immoderate monthly payments. A bully deal, yes? Well, yes and no. A reverse owe tin beryllium a bully financial instrumentality provided you make prudent usage of nan loan, according to nan Financial Industry Regulatory Authority (FINRA). 

What Is a Reverse Mortgage?

With a accepted mortgage, borrowers person a indebtedness amount, which they repay complete clip done monthly payments. With a reverse mortgage, borrowers person a indebtedness amount, which they whitethorn person arsenic a lump sum, bid of regular monthly payouts, aliases line of credit. The astir communal shape of reverse owe is simply a home equity conversion owe (HECM), which is backed by nan Federal Housing Administration (FHA). Borrowers must beryllium property 62 aliases older to suffice for one.

The indebtedness equilibrium for a reverse owe must beryllium repaid erstwhile nan borrower nary longer lives afloat clip successful nan home, which must beryllium their principal residence. This could beryllium owed to nan borrower trading nan home, moving retired for astatine slightest 12 months (say into a nursing home), aliases dying. In galore instances nan borrower or their heir(s) sells nan location to salary disconnected nan reverse owe indebtedness balance. 

What Does FINRA Say About Reverse Mortgages?

While FINRA acknowledges a reverse owe tin thief immoderate homeowners stay successful their home, nan statement besides urges homeowners to study each nan specifications of a reverse owe and measurement their options, truthful they tin make an informed determination connected really to proceed.

FINRA makes a constituent of informing homeowners that a reverse owe is not free money. As pinch accepted mortgages, nan indebtedness magnitude for a reverse owe will accrue liking complete nan life of nan loan. As such, erstwhile it’s clip to repay a reverse mortgage, nan borrower aliases their heirs whitethorn person to salary much than nan original indebtedness amount. 

FINRA besides alerts homeowners that reverse mortgages travel pinch fees and costs that tin beryllium importantly higher than pinch a accepted mortgage—sometimes arsenic overmuch arsenic 4% to 8% of nan full indebtedness amount. As pinch a accepted mortgage, these fees and costs tin beryllium rolled into nan full indebtedness amount, reducing really overmuch money you really person from nan reverse mortgage. In addition, for homeowners who person an existing mortgage, nan proceeds from a reverse owe will first beryllium utilized to salary disconnected that mortgage, which could time off nan borrower pinch overmuch little rate than expected. 

Another facet to reverse mortgages is that location are definite requirements borrowers must meet to support their reverse owe from defaulting and entering foreclosure proceedings. These include:

• Paying each spot taxes and insurance—such arsenic homeowners, flood, hazard, wind, aliases condo—on time
• Paying related expenses, specified arsenic homeowners relation fees and ground rents, connected time
• Maintaining nan location truthful that it remains successful bully condition
  

Consider if and Why You May Need a Reverse Mortgage

Many financial professionals and owe lenders urge a reverse owe arsenic a measurement to unrecorded a comfortable retirement—and it mightiness be—but FINRA warns homeowners to reappraisal their financial circumstances and assets cautiously earlier making a decision.

A FINRA Investor Alert titled “Reverse Mortgages: Avoiding a Reversal of Fortune” offers nan pursuing tips to homeowners considering a reverse owe (Investor Alerts are only disposable from FINRA done a free email subscription service):

• Review and measurement each options – If you’re looking for other cash, are location amended ways to get it than a reverse mortgage? Can you suffice for a home equity loan aliases home equity statement of in installments (HELOC)? Can you waste nan location and downsize? Are location local, state, and national programs to thief you salary your taxes and bills? 
  
• Understand nan consequence and cognize each nan fees and costs – It’s important to find retired earlier taking retired a reverse owe really overmuch it will costs you if you person to salary it back. This includes knowing nan liking rate, each costs and fees, and nan magnitude of immoderate prepayment penalty. 
  
• Know really a reverse owe could effect your financial eligibility – While a reverse owe does not effect your Social Security benefits aliases Medicare eligibility, it could impact Medicaid and Supplemental Security Income (SSI) eligibility. It besides whitethorn beryllium applicable to immoderate assistance aliases protection you mightiness person if you person to participate a nursing home. 
  
• Talk pinch a master – While nan U.S. Department of Housing and Urban Development (HUD) requires each borrowers who use for a reverse owe to talk pinch a HUD-approved counselor, it’s important to speak pinch others extracurricular nan transaction for an independent opinion. This could see an estate-planning attorney, a certified nationalist accountant (CPA), aliases a trusted financial advisor. 
  
• Think doubly earlier utilizing a reverse owe for finance purposes – Using a reverse owe arsenic an finance aliases to money an finance is simply a risky proposition astatine best, truthful FINRA cautions against taking that step. 
  

The Bottom Line

A reverse owe could beryllium an effective financial instrumentality to thief older homeowners enactment successful their homes and salary their surviving expenses. However, it whitethorn not beryllium nan champion option, truthful FINRA advises homeowners to do their ain investigation into nan afloat specifications and costs of a reverse owe and analyse alternatives earlier making a determination connected whether it is nan correct prime for them.