Reverse Mortgages: Are They a Scam or a Good Idea?
A reverse mortgage is a type of loan that allows homeowners 62 and older who have a large amount of home equity to borrow against their home value and receive cash income without making monthly payments. The loan is paid back when the homeowner moves out, sells their home, passes away, or fails to meet certain requirements.
Reverse mortgages can be a useful way to supplement your income in retirement, but they can also be a costly and risky option. Some people may consider reverse mortgages a scam because of the high fees, interest rates, and insurance premiums involved, as well as the potential loss of home equity and inheritance for your heirs. Others may see reverse mortgages as a good idea because of the flexibility, tax benefits, and protection from owing more than your home is worth.
In this article, we will explore both sides of the reverse mortgage debate and help you decide if it is a scam or a good idea for you.
Why Reverse Mortgages Are a Scam
Here are some of the reasons why reverse mortgages may be considered a scam:
• High fees and closing costs. Reverse mortgages come with upfront and ongoing costs that can reduce the amount of money you receive and increase your loan balance over time. These costs include origination fees, mortgage insurance premiums, servicing fees, and closing costs. Some lenders may charge higher fees than others or hide them in the fine print.
• High interest rates. Reverse mortgages typically have higher interest rates than conventional mortgages or home equity loans. The interest rate can be fixed or variable, depending on the type of payment option you choose. A fixed interest rate stays the same for the life of the loan, while a variable interest rate can change based on market conditions. The interest rate affects how much interest you accrue on your loan balance and how much you will owe in the end.
• Loss of home equity and inheritance. Reverse mortgages reduce your home equity and leave less money for your heirs when you sell your home or repay your loan. The longer you live in your home and keep the loan, the more interest and fees you will accrue and the more money you will owe. If your home value decreases over time, you may end up owing more than your home is worth. However, even if that happens, you or your heirs will not have to pay more than 95% of the appraised value of your home at that time, thanks to the non-recourse clause and mortgage insurance.
• Loss of eligibility for public benefits. Reverse mortgages may affect your eligibility for some public benefits, such as Medicaid or Supplemental Security Income (SSI), depending on how much money you receive and how you use it. These benefits have income and asset limits that you must meet to qualify. If you receive too much money from a reverse mortgage or do not spend it within a certain period of time, you may lose your eligibility for these benefits.
• Risk of foreclosure. Reverse mortgages require you to meet certain obligations to keep the loan in good standing. These obligations include paying property taxes, homeowners insurance, and maintenance costs for your home. If you fail to meet these obligations, you may default on your loan and face foreclosure. You may also lose your home if you move out permanently, sell your home, pass away, or fail to meet other requirements.
Why Reverse Mortgages Are a Good Idea
Here are some of the reasons why reverse mortgages may be considered a good idea:
• Access to cash without selling your home or making payments. Reverse mortgages allow you to tap into your home equity without having to sell your home or make monthly payments. You can use the money for any purpose, such as paying for living expenses, medical bills, home improvements, or travel.
• Flexibility in how to receive your money. Reverse mortgages offer different payment options that suit your needs and preferences. You can choose to receive your money as:
• A lump sum
• A line of credit
• Fixed monthly payments for as long as you live in your home or for a set period of time
• A combination of these options
• Tax benefits and protection from Social Security and Medicare impacts. The money you receive from a reverse mortgage is generally tax-free and does not affect your Social Security or Medicare benefits. However, you should consult with a tax professional before getting a reverse mortgage to understand how it may affect your tax situation.
Protection from owing more than your home is worth. Reverse mortgages have a non-recourse clause that protects you and your heirs from owing more than your home is worth when you sell your home or repay your loan. Even if your loan balance exceeds your home value, you or your heirs will only have to pay 95% of the appraised value of your home at that time. The rest of the loan balance will be covered by the mortgage insurance that you pay as part of the loan.
How to Avoid Reverse Mortgage Scams
While reverse mortgages are not technically a scam, they can be a target for scammers who try to defraud unsuspecting homeowners. Here are some tips to avoid reverse mortgage scams:
• Do your research. Before getting a reverse mortgage, do some homework and compare different lenders, fees, interest rates, and payment options. You can use a reverse mortgage calculator to estimate how much money you can receive and how much you will owe in the end. You can also check the lender’s reputation and reviews online or with the Better Business Bureau.
• Get counseling. Before applying for a reverse mortgage, you are required to get counseling from a HUD-approved reverse mortgage counselor. The counselor can help you understand the benefits and risks of a reverse mortgage, review your financial situation and goals, and explore other alternatives. You can find a reverse mortgage counselor near you by visiting https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome.
• Read the fine print. Before signing any documents, read them carefully and make sure you understand all the terms and conditions of the loan. Ask questions if anything is unclear or seems suspicious. Don’t sign anything that you don’t agree with or that has blank spaces. Don’t let anyone pressure you into making a hasty decision.
• Beware of contractors and vendors. Some unscrupulous contractors and vendors may try to convince you to get a reverse mortgage to pay for their services or products. They may offer you a discount or a free estimate if you agree to get a reverse mortgage from their preferred lender. Don’t fall for this trap. Always get multiple quotes and opinions before hiring anyone or buying anything for your home.
• Protect your identity and property. Don’t give out any personal or financial information to anyone who contacts you unsolicited about a reverse mortgage. Don’t let anyone access your home or property without your permission or supervision. Don’t give anyone power of attorney or sign over your title or deed to anyone without consulting a lawyer.
Conclusion
A reverse mortgage is a type of loan that allows homeowners 62 and older who have a large amount of home equity to borrow against their home value and receive cash income without making monthly payments. The loan is paid back when the homeowner moves out, sells their home, passes away, or fails to meet certain requirements.
Reverse mortgages can be a scam or a good idea depending on your situation and goals. They can be a scam if they come with high fees, interest rates, and insurance premiums, as well as the potential loss of home equity and inheritance for your heirs. They can be a good idea if they provide you with access to cash without selling your home or making payments, flexibility in how to receive your money, tax benefits and protection from Social Security and Medicare impacts, and protection from owing more than your home is worth.
Before getting a reverse mortgage, you should do your research, get counseling, read the fine print, beware of contractors and vendors, and protect your identity and property. You should also weigh the pros and cons of a reverse mortgage carefully and compare it with other alternatives before making a decision.