A reverse mortgage allows homeowners to convert part of the equity in a home to cash without having to sell the property. Due to the attractiveness of these loans, some senior citizens are being charged excessive up-front fees for services that are generally available free of charge or at a very low cost through the Department of Housing and Urban Development (HUD).
Reverse mortgages allow you to convert part of the equity in your home into cash without having to sell your home. The cash may be paid to you in installments or a lump sum, so typically you don’t need to pay anything back if you live in your house.
However, consumers should understand that because they’re deferring repayment of the reverse mortgage until they move out of their home or die, the amount they owe will grow substantially over time. Interest charges are added to the loan each day it’s held, so it’s possible the reverse mortgage may grow to equal the value of the home. People who take out reverse mortgages are also still responsible for property taxes, insurance and maintenance costs.
Some ads say that heirs can inherit the home, but to keep it they must pay off the reverse mortgage loan along with possible fees and charges that can add up.
Since reverse mortgages can be a quick source for cash, deceitful salespeople may encourage seniors to apply by making misleading claims. According to BankRate.com, the most common reverse mortgage scams to be on the lookout for include:
- “Take out a reverse mortgage so that you can delay Social Security payments.” Some brokers will tell homeowners to take out a reverse mortgage at age 62 to make up an income gap while delaying Social Security benefits to age 70. However, loan costs exceed the cumulative increase in Social Security that homeowners would receive by delaying benefits.
- “Buy this low-cost property for no money down.” Con artists will purchase a distressed or abandoned property then recruit seniors to “purchase” the property by transferring the deed to them for no charge
- “Free income with a no-risk reverse mortgage.” Not income and certainly not free. You receive loan payments, not income, which is why the money you receive from a reverse mortgage isn’t taxed. In addition, ads taking this approach may not disclose the fees you’ll pay. If you fail to pay property taxes or to maintain the property in good condition, you could lose your home.
Better Business Bureau of North Alabama recommends that homeowners read the ads carefully and fully understand all the costs, terms and conditions before taking out a reverse mortgage. Those who need cash should consider getting a less costly home equity line of credit and check into programs that help defer or lower taxes and utility bills.
Considering the following before applying for a reverse mortgage:
- Know the basic requirements.To apply for a reverse mortgage, a senior must be 62 years or older and have equity in the home. The home must be the primary residence and remain in good condition. The loan process can’t be initiated until the senior receives counseling from a Home Equity Conversion Mortgage counselor. Factors such as your age, the type of product, the value of your house and how much you owe on your house all contribute to the amount of money you may borrow.
- Consult a Home Equity Conversion Mortgage (HECM) counselor.An HECM counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association (FHA) does not recommend using any service charging a fee for referring a borrower to an FHA lender, as FHA provides all the information free of charge, and HECM housing counselors are available free or at a very low cost. For a list of approved counseling agencies, click here or call 800-569-4287.
- Involve heirs in the decision-making.Since a reverse mortgage affects the assets of the borrower in case of death, involving heirs will avoid future misunderstandings.
- Make sure a reverse mortgage suits your needs.Determine whether it is practical to remain in the home for 5-10 years to make the reverse mortgage economical. Take into consideration future health care needs as well as safety and ease of use of the home.
- Consider all the costs associated with obtaining a reverse mortgage.Be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and the interest rate.
- Understand the repayment terms.A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.
Source: BBB of North Alabama and BankRate.com
For a full list of reverse mortgage requirements, contact the U.S. Department of Housing and Urban Development.. To report a scam, go to the BBB Scam Tracker. To find trustworthy businesses, go to https://www.bbb.org