Last June in our blog titled Reverse Mortgages, we noted that, while reverse mortgages may have a role in retirement planning, some of the promotional efforts may not provide enough information regarding risks.
In December 2015, the Consumer Financial Protection Bureau ordered three companies to stop misleading ads and to pay combined penalties of approximately $800,000.
Reverse mortgages are complex transactions, but if used properly, can be useful in a well constructed retirement plan.
It is critical for home owners to recognize that, by engaging in a reverse mortgage, they have in effect “sold” their home. To the extent that they fully meet all of the terms of the agreement, they can continue to live in the home. Some of the key risks include; failure to make property tax payments, failure to maintain required insurance coverage and the obligation to provide for appropriate maintenance. If the house needs a new roof, the occupant is required to bear the cost.
The key factor in reverse mortgage transactions is the recognition that the borrower (home owner) has significant, and often costly, continuing obligations. Any failure to full comply can lead to foreclosure.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®