Reverse Mortgage Guide

FINRA — the Financial Industry Regulatory Authority — has issued an Investor Alert warning folks that “if they are approached by a financial professional to do a reverse mortgage in order to fund a particular investment, they should keep in mind that all investments carry risk and costs - and the higher the promised return, the higher the risk. And, in some cases, those who sell the mortgages may profit from the sale of the proposed investment, giving them twice the incentive to talk someone into a loan they may not need.”

“Be Skeptical of Reverse Mortgages as Part of an Investment Strategy,” says FINRA. “If someone urges you to obtain a reverse mortgage to make an investment or purchase an insurance product or a security, such as a deferred annuity, be very skeptical, particularly if they are promising high returns. In essence, they are encouraging you to speculate with your home equity, which you may need for more critical purposes down the road. Also consider what will happen if the returns turn out to be less than promised, or worse, you lose the principal. If you cannot sustain that kind of low return or loss, you should probably not be making the investment with your home equity.”

The release from FINRA, which describes itself as “the largest non-governmental regulator for all securities firms doing business in the United States,” is below:

FINRA Warns Senior Investors About Reversing Fortunes With Reverse Mortgages

Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) issued an Investor Alert today urging homeowners over the age of 60 to carefully weigh all of their options before tapping into their home equity through reverse mortgages to obtain additional income for their retirement years.

A reverse mortgage is an interest-bearing loan secured by the equity in a home and can be helpful to homeowners having trouble meeting expenses. The FINRA Alert cautions homeowners that these loans - which are being aggressively marketed as an easy, cost-free way for retirees to finance lifestyles or to pay for risky investments - can jeopardize their financial futures.

The new Investor Alert, “Reverse Mortgages: Avoiding a Reversal of Fortune,” explains how these loans, often called “rising debt” loans, allow borrowers to convert their home equity to cash to be used for any purpose. The Alert advises homeowners considering these types of loans to use the funds wisely. The Alert goes on to warn investors that if they are approached by a financial professional to do a reverse mortgage in order to fund a particular investment, they should keep in mind that all investments carry risk and costs - and the higher the promised return, the higher the risk. And, in some cases, those who sell the mortgages may profit from the sale of the proposed investment, giving them twice the incentive to talk someone into a loan they may not need.

“Reverse mortgages are an extremely costly way to fund an investment,” said FINRA CEO Mary L. Schapiro. “Homeowners need to consider all the risks and explore all of their options before taking out a loan that may prematurely deplete their home equity, which is often a homeowner’s most valuable asset and most precious source of retirement security.”

The Alert explains that reverse mortgages were originally designed as a tool for aging, low-income homeowners to keep their homes. Now, as more and more Americans are retiring and sitting on large pools of home equity, they are beginning to use reverse mortgages as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The Alert reminds borrowers reverse mortgages should generally be a last resort and offers tips to anyone considering these types of loans.

For additional information, see the FINRA Investor Alerts Seniors Beware: What You Should Know About Life Settlements; Betting the Ranch: Risking Your Home to Buy Securities; Variable Annuities: Beyond the Hard Sell; and Equity-Indexed Annuities—A Complex Choice. More information is also available in the U.S. Department of Housing and Urban Development publication Reverse Mortgages for Seniors.

This entry was posted on Friday, March 14th, 2008 at 3:01 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.