Should you get a reverse mortgage? Avoid the scams first
For people aged 62 and up, a reverse mortgage may seem like a tantalizing opportunity. After decades of sending in your monthly mortgage payments, you’re now getting money from your bank. A reverse mortgage siphons off the equity in your home and sends the cash to you to use for whatever you want. That includes paying off bills, covering a costly medical expense, home repair, or simply funding your retirement.
But here’s the rub: It’s not free money. Once you sell the house, move out or die, the loan must be repaid by either you, your spouse, or your estate. And, depending on how much is owed, that could mean selling your home and leaving a smaller inheritance to your heirs.
Who to watch out for
During COVID, as more people lost jobs and faced other financial emergencies, the Consumer Financial Protection Bureau, a federal agency, reports that a growing number of scammers are targeting older adults through reverse mortgages.
Some shady contractors claim reverse mortgages offer a “can’t miss” investment opportunity to make expensive home repairs, the agency says. Some homeowners to sign over power of attorney, so they can keep all the money.
Scammers attempt to target older homeowners through community organizations, investment seminars, or through TV, radio, billboard, and mailer advertisements. “Unfortunately, many older homeowners do not realize they have been scammed until the loan money is gone,” the agency writes.
The agency recommends three ways older homeowners can protect themselves:
- Never trust a contractor who claims a reverse mortgage is the best way to pay for a home improvement project.
- Move on if a reverse mortgage loan officer attempts to sell you on other “investment opportunities.” They aren’t allowed to sell them, says the agency.
- Always vet several lenders before deciding on a reverse mortgage.
Beware of the risks
It’s also important to remember that reverse mortgages come with some big downsides, the Federal Trade Commission reports. Again, it’s not free money.
Just like with most loans, fees and other costs come with the reverse mortgage. You’ll still need to pay interest and the more money you take out, the more you’ll owe over time. And often interest rates on reverse mortgages are variable, which means they will change over time with the market.
What’s more, if you don’t keep up on your other house payments, such as your property taxes or homeowner’s insurance, the lender could mandate that you repay the entire loan.
And often, particularly in lower-income and Black neighborhoods, reverse mortgages end badly, according to a USA Today analysis. The newspaper found high rates of foreclosure in those neighborhoods where lenders have made big promises about reverse mortgages, but not fully detailed the risks associated with them.
Reverse mortgage alternatives
Consider your alternatives first. Instead of pulling equity from your existing home, you can sell it and downsize. Another option is to refinance your mortgage, so your monthly payments are lower. This will also help you have more cash on hand. A home equity loan or credit line is another way to pull from your home’s equity without dealing with some of the risks of a reverse mortgage.
Every financial decision comes with risks and rewards. That’s why every “opportunity” must be vetted before a big move is made. After decades of building a nest egg for you and your family, it’s especially critical to be on alert for the fraudsters who are determined to steal it away.
Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt-free. Speak with a certified counselor for a free debt analysis today.
