What you should know about a reverse mortgage & how you can find out more: Internet Scambusters #385
More than 100,000 seniors take out a reverse mortgage each year to help with their finances.
But the market is growing so fast and the age group is considered so vulnerable that they’ve become a prime target for scammers.
In this issue, we highlight the risks and signpost your way to finding out more.
Reverse Mortgage Explosion Unleashes Scams
When times are hard or there’s a sudden need to splash out on a big ticket item, a reverse mortgage can be a possible solution.
But the emphasis is on the “can be” part of that statement. Of course, you should always speak to a qualified and reputable professional about reverse mortgage pros and cons. But you also need to be aware of reverse mortgage scams.
In very simple terms, a reverse mortgage provides cash — a lump sum or a steady income — against the value of your home. You may or may not have to immediately pay interest on the loan, but the capital sum and any accrued interest is repaid to the lender only when the homeowner moves or dies.
So reverse mortgages tend to be used mainly by older homeowners. In fact, they’re usually not even available to owners below age 62. In 2008, more than 100,000 seniors in the US used them to raise an estimated $17 billion and experts say 2009 could have been a record.
But some members of this older age group also happen to be among the most vulnerable to scams.
A report published last October by the National Consumer Law Center (NCLC) noted that “the continuing availability of reverse mortgages is good news for seniors who need to cash out some of their housing wealth to supplement Social Security, to meet unexpected medical costs, or to make needed home repairs. But growth in the reverse mortgage market has unleashed other, more malign forces.”
How reverse mortgage scams work
High pressure sales tactics are sometimes used to persuade owners who don’t really need one, to take out a reverse mortgage and perhaps to put the money into a risky or scam investment that promises high returns.
Using the same tactics, disreputable lenders charge astronomically high interest rates, which eat up the entire capital value of a home or even saddle the estate of a deceased homeowner with considerable debt beyond the value of the home (although legitimate loans are usually protected against this).
Another reverse mortgage con involves fooling owners into signing documentation that enables a crook to apply for and get a loan and then disappear with the payout.
And, of course, there are cases when a reverse mortgage is simply not the best or cheapest way of getting money, but an unscrupulous broker convinces you it is — picking up a juicy commission along the way.
Ambiguous advertising, pushy telesales people and unsolicited mail are the main sources of these scams. Some mailings disguise the reverse mortgage as some kind of government scheme or use official sounding names in the letterheads.
Other times, a sales person promoting home improvements or remodeling might suggest a reverse mortgage as a way of financing the changes.
Recently, the Federal Financial Institutions Examination Council (FFIEC) announced plans to protect consumers from deceptive claims and to help them make better-informed decisions about whether to obtain a reverse mortgage.
However, these mainly involve guidance for registered financial organizations and, as we know, many scammers operate outside official channels.
How to learn more about reverse mortgages
If you are considering a reverse mortgage as an option for raising money, here are some suggestions on how to find out more:
- As we said at the outset, you should always seek professional advice about big financial decisions like a reverse mortgage. (Scambusters cannot and does not offer financial advice.)
Work with your advisor to shop around for different money-raising options and to make comparisons.
Use an advisor whom you know and trust or one who comes highly recommended.
- Check out the American Association of Retired People (AARP) Reverse Mortgage Education Program.or write to: Reverse Mortgage Education Project AARP Foundation 601 E Street, NW Washington, DC 20049 Or call 1-800-209-8085
- Download and read the Federal Trade Commission’s new publication: Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity.
The FTC also offers these warnings:
- Lenders generally charge origination fees and other closing costs for a reverse mortgage. They may charge servicing fees during the term of the mortgage.
- The amount you owe on a reverse mortgage gets bigger over time. Interest is charged on the outstanding balance and added to the amount you owe each month.
- Most reverse mortgages have variable rates that are tied to a financial index and are likely to change according to market conditions.
- Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs.
- Because you retain title to your home, you are responsible for paying property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay these expenses, you risk the loan becoming due and payable.
- Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
Even if a reverse mortgage is not an option or an issue for you, you may know someone, a senior, who might be thinking about one, so please consider passing this information on to them.
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Time to conclude for today — have a great week!