Reverse mortgages were deemed both risky and costly for older homeowners, according to a report released this week by Consumer Reports.
The publication noted that many marketers of reverse mortgages, otherwise known as Home Equity Conversion Mortgages (HECMs), engage is “questionable sales tactics” and make misleading claims to minimize the associated risk of these types of loans.
Senior citizens also happen to be very susceptible to misleading marketing, so the danger is two-fold.
“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, senior staff attorney for Consumers Union, the nonprofit publisher of Consumer Reports, in a release.
“Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income.”
The report also found that many mortgage lenders that sell reverse mortgages cross-promote products that homeowners may not need, including long term care insurance and annuities.
Reverse Mortgages Leading to More Foreclosures
As of March 2010, 20,631 reverse mortgage loans were in default, thanks to borrowers failing to pay their homeowners insurance premiums and taxes (what goes into a mortgage payment?).
“Reverse mortgages are likely to generate an even greater number of foreclosures when borrowers die and their heirs are not able to take possession of the home by paying off the mortgage,” the publication warned.
Additionally, the annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled, from $81.3 million in 2004 to $381.3 million as of 2008.
Reverse mortgages are available to homeowners aged 62 or older with owner-occupied properties.
They allow borrowers with home equity to pull cash-out of their home on a monthly or lump sum basis without having to make monthly mortgage payments.