A reverse mortgage can provide older homeowners with an additional stream of income in retirement. Reverse mortgages allow eligible homeowners to tap into their equity, without taking a traditional home equity loan. But are reverse mortgages a scam? No, but there are opportunities for scammers to defraud unsuspecting homeowners if you don’t know what to look out for. If you are considering a reverse mortgage, a financial advisor can help you consider different options and protect you against potential scams.
What Is a Reverse Mortgage?
A reverse mortgage is a financial product that allows homeowners to tap into the equity in their homes without taking out a traditional home equity loan or line of credit. Homeowners can use the money from a reverse mortgage to pay medical bills, consolidate debt or simply pay for day-to-day living expenses in retirement.
Reverse mortgages that are regulated by the federal government are called Home Equity Conversion Mortgages (HECMs). These reverse mortgage products are available to homeowners who:
- Are at least 62 years of age
- Own their homes outright or have paid down most of their mortgage debt
- Have sufficient financial resources to cover property taxes, maintenance and other costs of upkeep
- Live in an eligible property and use it as their primary residence
- Are not delinquent on any federal debt
A reverse mortgage generally does not require repayment during the homeowner’s lifetime as long as they’re using the home as their primary residence. Should they pass away or require a permanent move to a long-term care facility, the reverse mortgage would need to be paid back to the lender.
Reverse mortgages are commonly repaid using the proceeds from the sale of the home after the original borrower passes away. However, family members who inherit the property could use other assets to pay off a reverse mortgage if they’d like to keep the home.
Are Reverse Mortgages a Scam?
Reverse mortgages are a legitimate borrowing tool that eligible homeowners can use to generate a supplemental stream of income using their home equity. A reverse mortgage could be more attractive than a home equity loan or HELOC, both of which would require repayment during their lifetimes.
In the case of home equity conversion mortgages, those are highly regulated. Lenders who offer these mortgages must be approved by the government to do so follow strict guidelines when granting them to borrowers. Likewise, borrowers must adhere to certain rules in order to qualify for a reverse mortgage.
That being said, reverse mortgages can be targets for scams or fraud just like any other financial product. Being able to recognize the signs of a reverse mortgage scam is important for avoiding them.
Common Reverse Mortgage Scams
Reverse mortgage scams can take different forms, but they all share the same goal: To defraud unsuspecting homeowners. If you’re considering a reverse mortgage, here are some of the worst scams to watch out for.
- Free money scams: Scammers may attempt to mislead homeowners by telling them that a reverse mortgage is free money. That’s simply untrue, as a reverse mortgage does need to be paid back eventually. Reverse mortgages accrue interest and fees may be added on as well.
- Investment schemes: Another scam encourages homeowners to withdraw equity using a reverse mortgage in order to invest it elsewhere. The scammer promises big returns only to fall short on the delivery or worse, make off with the homeowner’s money altogether.
- Home improvement scams: Another common reverse mortgage scam involves fraudulent contractors. The contractor might tell the homeowner they need to make an expensive repair, then suggest a reverse mortgage as a way to get the funds to pay. The homeowner takes out a reverse mortgage and then hands the money over to the contractor, who mysteriously disappears without completing any of the work.
- Family fraud or elder financial abuse: In some cases, the person who perpetrates a reverse mortgage scam is someone who’s close to the homeowner. A relative or caregiver may coerce a homeowner into taking out a reverse mortgage and handing over the money to them or resort to falsifying documents in order to obtain one.
- Real estate scams: Scammers can also use the promise of lucrative real estate investments to swindle money out of homeowners via a reverse mortgage. A realtor might tell the homeowner they could make an investment in a fix-and-flip property using a reverse mortgage. The homeowner gives the realtor the money to buy the home, only to find out the property either doesn’t exist and the realtor is a fake.
- Foreclosure scams: Homeowners who are facing foreclosure can be a target for reverse mortgage scammers. The scammer tells the homeowner to take out a reverse mortgage and use the money to get caught up on their primary home loan. Only instead of paying off the mortgage to avoid foreclosure, the scammer diverts the money into their own pockets.
- Misleading tactics: While not a scam per se, reverse mortgage lenders may use misleading tactics or misinformation to get seniors to sign off. For example, they might tell the homeowner that there’s no chance of them losing their home when that’s incorrect. Or they might be less than transparent about the interest rates and fees associated with the reverse mortgage.
How to Avoid Reverse Mortgage Scams
Reverse mortgage scams can cause financial damage but there are some things you can do to avoid falling victim to one. First, you can recognize the signs of a potential scam by keeping an eye out for these potential signs:
- You’re not looking for a reverse mortgage when someone contacts you about one out of the blue.
- The person contacting is reluctant to disclose details about the reverse mortgage or themselves or they fail to provide straightforward answers to your questions.
- When you press them for information, they become threatening or intimidating and otherwise refuse to take no for an answer.
- The person promises things that are too good to be true or says you should only trust them for information.
- They ask you outright for sensitive personal or financial information.
Doing your research and being wary of unsolicited offers can help you to avoid reverse mortgage scams. The first step is understanding how a reverse mortgage works and what your obligations are as a homeowner.
Next, you can research reputable lenders. The Department of Housing and Urban Development (HUD) can help you find legitimate lenders that offer home equity conversion mortgages. You can then compare each lender individually to learn more about their lending practices and overall reputation. Once you choose a lender, be sure to ask questions if there’s anything you don’t understand and ask for copies of all relevant paperwork.
The Bottom Line
Reverse mortgages are not scams in and of themselves, but there are scammers who may use them to defraud unwitting homeowners. This is similar to many legitimate financial products and opportunities. The better you understand what a reverse mortgage is and what it’s designed to do, the harder it may be for a scammer to dupe you into draining your equity. You can also work with a vetted professional to improve your chances of identifying potential scams.
- Consider talking to your financial advisor about your options for creating retirement income and where a reverse mortgage might fit into your plan. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A home equity loan or line of credit could put cash in your hands that you can use for a variety of purposes. With a home equity loan, you’re borrowing a lump sum of money which is repaid with interest. A home equity line of credit allows access to a revolving credit line and you only pay interest on the amount of your credit line you use. Either one could be a suitable alternative for withdrawing equity from your home if you’re not eligible for a reverse mortgage or would prefer another borrowing option.
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