The decision to take out a reverse mortgage should never be taken lightly, and the Consumer Financial Protection Bureau wants to make sure consumers are considering all of the perks and numerous pitfalls.
The CFPB updated its reverse mortgage guide [PDF] to reflect recent changes that may make the often risky process of taking out a reverse mortgage a fraction less burdensome for borrowers and their families.
Reverse mortgages allow a borrower, 62 years or older, to convert the equity on their home into a lump sum or monthly payments. Generally, those funds are not required to be paid back until the borrower moves or dies.
In the past, when a named reverse mortgage borrower died their surviving spouse or family was often left to repay the funds in a short period of time or lose their home.
According to the CFPB, recent changes mean a non-borrowing spouse may be able to continue to live in the home under certain conditions, even after the spouse who signed the loan passes away. However, the non-borrowing spouse will still stop receiving funds from the reverse mortgage after his or her spouse dies.
The only option for a surviving spouse to continue to receive monthly payments or use the existing line of credit is if the couple takes out the reverse mortgage together in the first place.
A second change in reverse mortgage rules concerns the amount of funds consumers can take up front.
First-year payout limits are meant to encourage borrowers to make their money last longer. In the past, consumers who took a full lump-sum payment in the first year often outlived their funds; creating financial vulnerability.
While borrowers can still take out lump-sum single payments, the CFPB urges borrowers to consider the monthly payment or line of credit options before choosing to get a lump-sum.
The CFPB warns that while the recent reverse mortgage changes offer a bit more protection to consumers, the process is still a risky and expensive option.
Updated reverse mortgage guide: Two things you should know [CFPB]
by Ashlee Kieler via Consumerist
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