Regulator Warns Consumers On Reverse Mortgages

By Trevor Thomas

March 13, 2008 at 11:07 AM

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Although a reverse mortgage can be helpful to homeowners having trouble paying their bills, it also can jeopardize the homeowners' financial future, warns the Financial Industry Regulatory Authority.

FINRA, Washington, says the loans often are aggressively marketed as an easy, cost-free way for retirees to pay for lifestyles, or even for risky investments that can endanger their financial security.

The organization issued an alert urging homeowners to weigh their options carefully before proceeding with a reverse mortgage. If consumers do decide a reverse mortgage is right for them, they still need to be sure to make prudent use of the proceeds, advises FINRA in a new investor alert, "Reverse Mortgages: Avoiding a Reversal of Fortune."

The agency notes that reverse mortgages are expensive.

Interest rates for reverse mortgages tend to be higher than rates for home mortgages and other types of loans, while fees and costs of these loans are often significantly higher, too–sometimes as high as 4% to 8% of the total loan amount.

The result is the borrower can wind up with less cash than expected, FINRA says.

FINRA also is telling potential reverse mortgage borrowers that they will still be responsible for property taxes, insurance and maintenance costs on their homes.

"If you are not able to meet these obligations, the lender may have the right to foreclose on your home, leaving you in the worst possible situation–no place to live, and no more home equity to draw on," FINRA says.

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