The U.S. Office of the Comptroller of the Currency has issued guidelines warning financial advisors and consumers what to consider before entering into reverse mortgage contracts.
Reverse mortgages, available to anyone who owns a home or substantial equity in a home and is 62 years of age or older, are complex contracts secured by the borrower's home, according to the guidelines. They are expected to be marketed more heavily as the population ages.
A standard mortgage or home equity line of credit may be more advantageous to the client who wants more retirement income or needs to pay health bills or other large expenses, says the comptroller guidelines. That's because reverse mortgages have high upfront costs, making the first years of the loan expensive.
"For this reason, it is very important to have a realistic understanding of, not just your life expectancy, but also how long you can afford to pay the expenses related to your home, including utilities, property taxes, insurance, maintenance and repairs, and condominium fees, and how long you are physically able to keep living there," the guidelines warn.
The average reverse mortgage borrower stays in a home for only six years, but it is most advantageous to remain in a home at least 10 years, according to the guidelines.
Advisors should warn clients that they may be the target of "aggressive sales pitches for expensive and inappropriate products or services" because of the large sum of money they receive from a reverse mortgage.
Most, but not all, reverse mortgages are made under a Federal Housing Administration program and are known as Home Equity Conversion Mortgages. The FHA provides protections for the borrower and the lender. The terms of reverse mortgages vary depending upon costs, payout options and repayment plans. Clients or their heirs want to pay it off and keep the home, says the comptroller, creating a web of options that need to be explored.
Additional information can be found at the U.S.Department of Housing and Urban Development (www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm); NeighborWorks America (www.nw.org/network/home.asp); the AARP (www.aarp.org/revmort); the National Association of Reverse Mortgage Lenders (www.reversemortgage.org); and the National Council on Aging (www.benefitscheckup.org).