It Offers Advantages, But There Are Hidden Costs

By Harry Kelber | The American Labor Movement | October 25, 2012

A reverse mortgage is a loan available to home owners of retirement age, enabling them to access a portion of their home’s equity. The home owners can draw the principal in a lump sum or by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit or some combination of these options.

In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so, with no pre-payment penalties. The line of credit is adjustable, depending on whether the home owner increases or decreases payments. Interest that accrues is added to the mortgage balance.

Title to the property remains in the name of the home owners, to be disposed of as they wish, encumbered only by the amount owing under the mortgage.

If a a property has increased in value, it may be possible to take out a second or even a third reverse mortgage.

Owners Face Risks on Reverse Mortgages

A U.S. financial regulator has warned that new rules may be needed to address hidden dangers in reverse mortgages, the special loans that enable cash-strapped seniors to borrow against the equity in their homes.

Deceptive marketing practices, complicated loan terms and fraudulent lenders are some of the problems the Consumer Financial Protection Bureau highlighted in the $90 billion industry, which is expected to expand in popularity as tens of millions of baby boomers become home owners and grow older, as they struggle to pay for their retirement.

Nearly 10 percent of reverse mortgage borrowers are at risk of foreclosures because they have failed to pay taxes and insurance, according to a study mandated by the 2012 Dodd-Frank financial overhaul.

Since investing in a reverse mortgage involves considerable risk for the inexperienced home owner, the AFL-CIO should assemble a group of its lawyers to advise union members on the pitfalls of reverse mortgages.

The labor federation should be involved in any changes in the loan industry to ensure that workers’ interests are protected.

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