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Considering a reverse mortgage? Know the risks

10/13/2016 11:40:59 AM

For Immediate Release:

SAINT PAUL – Minnesota Commerce Commissioner Mike Rothman is urging Minnesota homeowners who may be considering a reverse mortgage to make sure they fully understand the risks as well as the benefits involved with this complicated financial product. Rothman’s agency recently fined a California company for deceptive marketing of reverse mortgages.

A reverse mortgage is a special type of home loan that allows older homeowners to “cash out” the equity they have built up in their homes and defer repayment until they pass away, sell or move out. The borrower may receive either a lump-sum payment, a series of monthly payments or a line of credit. 

“Older Minnesotans who are considering a reverse mortgage to tap into their home equity must be careful about jeopardizing their family's financial security,” said Rothman, whose department regulates mortgage companies. “Advertisements for reverse mortgages can sometimes confuse or mislead seniors about the real costs and potential drawbacks of these loans, putting their homes and hard-earned life savings at risk.”

The Minnesota Commerce Department recently took action against American Advisors Group for sending prospective borrowers marketing material in an informational DVD which falsely claimed that a senior could not lose their home after taking out a reverse mortgage. The DVD did not properly disclose that borrowers could in fact lose their homes if they did not pay the required insurance and property taxes.

Under the terms of a consent order with the Commerce Department, the company must pay a $20,000 fine and comply with Minnesota law that prohibits false, deceptive or misleading advertising related to residential mortgage loans.

The U.S. Consumer Financial Protection Bureau recently conducted focus groups on reverse mortgage advertisements. After viewing ads, many consumers did not understand that reverse mortgages were loans with fees and interest that had to be paid back. Many were also left with the false impression that a reverse mortgage ensured that they could live in their homes and enjoy financial security for the rest of their lives.

Reverse mortgages allow homeowners over the age of 62 to convert home equity into cash. They are often marketed as a financial opportunity for seniors who own their homes but have fixed incomes or limited assets.

While reverse mortgages may be a good option for some people, they are also complex and costly financial products that are not risk-free or suitable for everyone. 

Rothman offers these tips for senior homeowners who may be considering a reverse mortgage:

Consider other options. If you only need to borrow a limited amount of money for a specific period of time, look into a traditional home-equity loan or line of credit instead.

Get advice. Before deciding on a reverse mortgage, discuss your circumstances with a trusted friend, adviser or family member. Both federal and state law now require that you meet with an independent housing counselor approved by the U.S. Department of House and Urban Development (HUD) before taking out a reverse mortgage.

Be sure you understand ALL the risks of a reverse mortgage. Don’t sign loan documents unless you fully understand how a reverse mortgage works. Because you are deferring repayment until you move out of your home or die, the amount you owe will grow substantially over time. There may be little or no home equity left to pay for long-term care expenses or, when you die, your heirs will have to repay the loan in full to retain ownership of the home.

Watch out for high upfront costs. Make sure you understand all fees and costs in the transaction. These expenses tend to be higher than with a regular mortgage, and they may not be readily apparent to you when paid directly from the loan proceeds.

Don’t give in to high-pressure sales tactics. Look out for reverse mortgage scams. If an offer sounds too good to be true, it probably is.

You can change your mind. Federal regulations allow borrowers to cancel a reverse mortgage within three business days of execution. Minnesota law also has a seven-day “cooling-off period” after a borrower’s acceptance, in writing, of the lender’s written commitment to make the mortgage. During this time, you cannot be required to close or proceed with the loan.

Check out your lender. /commerce/consumers/tips-tools/license-lookup.jspUse the License Lookup tool on the Minnesota Commerce Department website to make sure the company or individual you are doing business with is licensed in the state as a mortgage originator. 

Commerce is here to help

If you have a question or concern about reverse mortgages, contact the Commerce Department’s Consumer Services Center by email at consumer.protection@state.mn.us or by phone at 651-539-1600 or 800-657-3602 (Greater Minnesota).

Media Contact:
Ross Corson
Director of Communications
Minnesota Department of Commerce
P: 651-539-1463 | C: 651-368-5050 | ross.corson@state.mn.us

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