Why Are Reverse Mortgages So Misunderstood?
Why Are Reverse Mortgages So Misunderstood?
Reverse mortgages have been available for decades, yet many people still don’t understand how they work. Misconceptions and myths often overshadow the benefits they can offer, leading to dismissal without due consideration. If you’ve ever wondered why reverse mortgages have a questionable reputation, we’ve compiled some key reasons for their misunderstandings. Knowing the reality can help you decide if a reverse mortgage might be a good fit for your financial goals.
1. A Small Slice of the Mortgage Market
While reverse mortgages help many people every year, they make up a tiny fraction of all home loans. According to the U.S. Department of Housing and Urban Development (HUD), just over 32,991 Home Equity Conversion Mortgages (HECMs) were issued in 2023, representing less than 1% of all mortgages that year.
Because of their scarcity, most people aren’t familiar with reverse mortgages compared to conventional ones. This lack of knowledge may lead to misunderstandings or incorrect assumptions, often expanding through word of mouth.
2. Media Coverage Can Be Misleading
Given their rarity, many people first hear about reverse mortgages from news stories. Unfortunately, sensational or negative stories make for more compelling headlines than stories of happy borrowers. As a result, media coverage can skew perceptions.
While it’s not to say negative stories are unfounded, they don’t represent the majority of reverse mortgage experiences. In fact, most borrowers report high satisfaction rates with their reverse mortgages. For example, in 2022, complaints to the Consumer Financial Protection Bureau (CFPB) about reverse mortgages accounted for less than 2% of 29,100 complaints. Additionally, a 2018 Journals of Gerontology survey revealed that HECM borrowers often had higher financial and housing satisfaction three to five years after getting a HECM compared to their non-borrower counterparts.
3. Lack of Discussion Among Financial Advisors
Financial advisors often play a crucial role in guiding their clients' financial decisions, but they may not proactively discuss reverse mortgages. A 2022 Harris Poll survey found that 90% of respondents expected their advisors to bring up relevant home equity loans. Yet, only 29% of respondents with advisors had conversations about equity options.
Advisors may avoid reverse mortgages for many reasons, including lack of expertise or familiarity with the product. Whatever the reason, this omission may lead potential borrowers to believe there’s a more significant reason their advisors haven’t mentioned it.
4. Confusion from the Name
Reverse mortgages are inherently different from their more familiar counterparts, and even their name can cause confusion. “Reverse” may invoke negative associations or imply something suspect, as it contrasts with words like “forward-thinking.”
In reality, the name makes sense when you understand how the product works: instead of making monthly payments toward the loan balance, the borrower receives funds while the loan balance grows over time. Still, the name may contribute to misunderstandings and initial skepticism.
What Do Reverse Mortgage Borrowers Pay?
While reverse mortgage borrowers don’t make monthly mortgage payments, they must stay in good standing with their loan. This means:
Paying property taxes, homeowner’s insurance, and home-related fees
Living in the home as their principal residence
Maintaining the home in good condition
Failure to meet these obligations may require repayment of the loan.
Get the Facts
The misunderstandings surrounding reverse mortgages can be traced back to multiple sources. Before dismissing this financial tool, take the time to get the facts. Understanding the truth about reverse mortgages could reveal a solution that fits your needs and goals.