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Older Homeowners Warned about Reverse Mortgages

But it may still be a better option than foreclosure

By D.O. Volente
ConsumerAffairs.com

March 15, 2008

A regulatory body is urging homeowners over the age of 60 to carefully weigh their options before tapping into their home equity through reverse mortgages to obtain additional income for their golden years.

The group, Financial Industry Regulatory Authority, which was formed by a merger of the NASD and some regulatory functions of New York Stock Exchange parent NYSE Group Inc., warned that a reverse mortgage -- an interest-bearing loan secured by the equity in a home -- can jeopardize seniors' financial futures.

With a reverse mortgage, a bank makes payments to a homeowner instead of the homeowner making payments to a bank.

The loan is repaid, with interest, when the borrower sells the house, moves out or dies. Reverse mortgages have high fees -- typically about 7% of the home's value -- and they make it difficult for homeowners to leave the property to their heirs.

The warning notes that, in some cases, those who sell the mortgages may profit from the their sale, giving them twice the incentive to talk someone into a loan they may not need.

Last resort

Finra Chief Executive Mary L. Schapiro said home equity "is often a homeowner's most valuable asset and most precious source of retirement security." Accordingly, the agency reminded homeowners that reverse mortgages should generally be a last resort.

Reverse mortgages were originally designed as a tool for aging, low-income homeowners to keep their homes, Finra said. But they have been used more often by retiring Americans as a way to finance a more-extravagant retirement lifestyle than they could otherwise afford.

Still, as foreclosure rates continue to rise amid the subprime-mortgage crisis, some homeowners who have built up equity in their home may consider reverse mortgages their best option against losing it.

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