FINRA’s Position on Reverse Mortgages

It’s not black and white

Initially, a reverse mortgage can sound like free money. Based on how much home equity you have, your lender gives you a loan amount, for which you don’t have to make any monthly payments. A good deal, yes? Well, yes and no. A reverse mortgage can be a good financial tool if you make prudent use of the loan, according to the Financial Industry Regulatory Authority (FINRA)

Key Takeaways

  • Homeowners should find out all the details and facts of a reverse mortgage before getting one. 
  • Interest rates, fees, and costs can be significantly higher with reverse mortgages than with other mortgage types. 
  • The Financial Industry Regulatory Authority (FINRA) recommends trying to find other options to a reverse mortgage.

What Is a Reverse Mortgage?

With a traditional mortgage, borrowers receive a loan amount, which they repay over time through monthly payments. With a reverse mortgage, borrowers receive a loan amount, which they may receive as a lump sum, a series of regular monthly payouts, or a line of credit. The most common form of reverse mortgage is a home equity conversion mortgage (HECM), which is backed by the Federal Housing Administration (FHA). Borrowers must be age 62 or older to qualify for one.

The loan balance for a reverse mortgage must be repaid when the borrower no longer lives full time in the home, which must be their principal residence. This could be due to the borrower selling the home, moving out for at least 12 months (say, into a nursing home), or dying. In many instances, the borrower or their heir(s) sells the home to pay off the reverse mortgage loan balance. 

What Does FINRA Say About Reverse Mortgages?

While FINRA acknowledges that a reverse mortgage can help some homeowners remain in their home, the organization also urges homeowners to learn all the details of a reverse mortgage and weigh their options, so they can make an informed decision on how to proceed.

FINRA makes a point of warning homeowners that a reverse mortgage is not free money. As with traditional mortgages, the loan amount for a reverse mortgage will accrue interest over the life of the loan. As such, when it’s time to repay a reverse mortgage, the borrower or their heirs may have to pay more than the original loan amount. 

FINRA also alerts homeowners that reverse mortgages come with fees and costs that can be significantly higher than with a traditional mortgage—sometimes as much as 4% to 8% of the total loan amount. As with a traditional mortgage, these fees and costs can be rolled into the total loan amount, reducing how much money you actually receive from the reverse mortgage. In addition, for homeowners who have an existing mortgage, the proceeds from a reverse mortgage will be used first to pay off that mortgage, which could leave the borrower with much less cash than expected. 

Another aspect to reverse mortgages is that there are certain requirements that borrowers must meet to keep their reverse mortgage from defaulting and entering foreclosure proceedings. These include:

Consider If and Why You May Need a Reverse Mortgage

Many financial professionals and mortgage lenders recommend a reverse mortgage as a way to live a comfortable retirement—and it might be—but FINRA warns homeowners to review their financial circumstances and assets carefully before making a decision.

A FINRA Investor Alert titled “Reverse Mortgages: Avoiding a Reversal of Fortune” offers the following tips to homeowners considering a reverse mortgage (Investor Alerts are only available from FINRA through a free email subscription service):

What is a reverse mortgage?

A reverse mortgage provides you with an income stream based on your home equity. It requires no monthly payments, as with a traditional mortgage, and it does not come due until you sell your home, move out, or die.

Is a reverse mortgage a source of free money?

No. It accumulates interest, and there are also costs and fees that are more expensive than with traditional mortgages. A homeowner can end up owing much more than the original amount of the loan when a reverse mortgage becomes due.

Does the Financial Industry Regulatory Authority (FINRA) say reverse mortgages are not a good choice for all homeowners?

No. The Financial Industry Regulatory Authority (FINRA) acknowledges that a reverse mortgage could be a good option for some homeowners, but it cautions them to make an informed decision based on the facts, including how much it will cost, how it must be repaid, and the effects that it could have on their financial future. 

The Bottom Line

A reverse mortgage could be an effective financial tool to help older homeowners stay in their homes and pay their living expenses. However, it may not be the best option, so FINRA advises homeowners to do their own research into the full details and costs of a reverse mortgage and examine alternatives before making a decision on whether it is the right choice for them. 

Article Sources

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  1. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”

  2. Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?

  3. Consumer Financial Protection Bureau. “When Do I Have to Pay Back a Reverse Mortgage Loan?

  4. American Advisors Group. “The Most Common Way to Repay a Reverse Mortgage.”

  5. Financial Industry Regulatory Authority. “Reverse Mortgages: Avoiding a Reversal of Fortune,” Page 1.

  6. Financial Industry Regulatory Authority. “Reverse Mortgages: Avoiding a Reversal of Fortune,” Page 2.

  7. National Reverse Mortgage Lenders Association. “What You Need to Know About Your HECM After Closing,” Pages 3–4.

  8. Financial Industry Regulatory Authority. “Reverse Mortgages: Avoiding a Reversal of Fortune,” Page 3.