U.S. consumer watchdog Consumer Financial Protection Bureau is increasing oversight of reverse mortgages after a recent report found them to be confusing and often misused. The mortgages are intended to provide a source of income to help elderly people remain in their homes — borrowers only have to pay property taxes and homeowners insurance and can defer loan payments as long as they still live in the house.
Here’s why buyers should beware:
- There still are monthly interest charges, fees and other costs. While the borrower does not make interest payments, they still are added to the balance at the end.
- While you don’t have to pay back the loan as long as you live in the house, maintain it and pay the insurance and property taxes, the loan must be paid off in full if you move or when you die.
- The mortgages have changed. Three years ago, most of the loans were adjustable-rate and the borrower had a choice between monthly payments for everyday expenses, a line of credit for major expenses or a combination of the two. Now, you can get paid in a lump sum — a risky option 70% of people chose in 2011.
- Borrowers are getting younger, which means things are getting even riskier. Over time, home equity decreases while the loan balance increases. If the value of the loan exceeds the value of the home, the borrower will not receive any money when the house is sold.
- Almost 10% of reverse mortgage borrowers as of February 2012 were at risk of losing their homes to foreclosure.
- On top of that, the confusing loans could grow in popularity as more baby boomers retire.
– Alyssa Oursler, InvestorPlace Editorial Assistant