Reverse mortgages sound like a great idea, especially when you’ve built up significant equity in your home and you’re looking for an additional income stream.
But they can be risky business, especially when unscrupulous characters attempt to dupe homeowners into bad reverse mortgage schemes that can ultimately hurt them.
What is a reverse mortgage actually?
A reverse mortgage, according to the Consumer Financial Protection Bureau, is when you borrow against the equity you’ve built up in your home — hence why it’s called a “reverse” mortgage. The lender is giving you money instead of the other way around. The main downside is that as you continue to borrow against the equity in your home, you are slowly depleting that equity over time, which makes it difficult to sell the home later on.
Also, there are upfront costs to take into account as well. Lenders charge fees for reverse mortgages and closing costs, and some lenders even require borrowers to go through mortgage counseling. You may also have to pay for additional mortgage insurance. The average reverse mortgage lasts for seven years but can cost the borrower more than $31,000 in interest and fees over that time period, the CFPB found.
Reverse mortgage scams to watch out for
Reverse mortgage scams typically target older homeowners who have lived in their homes for a long time, might be eager for extra sources of income, and have built up significant equity in their home. This makes them an especially vulnerable target.
“Seniors are frequently targeted through local churches and investment seminars, as well as television, radio, billboard, and mailer advertisements,” the FBI says.
Investment schemes. Beware of realtors or any other professional who encourages you to take out a reverse mortgage in order to finance a real estate investment. They may market the opportunity as a way to flip a house for a profit. But they may take your money and you’ll never see them again.
Home improvement schemes. In a similar scheme, a contractor may talk a borrower into financing home improvements by — you guessed it — taking out a reverse mortgage. And of course, once the check is cashed, they may run off and leave the borrower hanging.
Friendly faces fraud. This isn’t the official name for this type of reverse mortgage scam, but it seems to fit. Relatives or close family friends may try to pressure homeowners into taking out a reverse mortgage but they may actually want to take the money for themselves. And the homeowner is left with depleted equity and no hopes of ever seeing the money again.
Tips to avoid reverse mortgage scams
- Beware of unsolicited reverse mortgage offers.
- Work with an independent reverse mortgage counselor to weigh the pros and cons.
- Don’t sign documents for a reverse mortgage unless you fully understand them or have them reviewed by an attorney.
- Watch out for misleading claims that you can buy a home with no down payment with a reverse mortgage.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.