Reverse Mortgages: Why They're Really Too Good To Be True

By Douglas Rice | June 12, 2009 AAA
Reverse Mortgages: Why They're Really Too Good To Be True

Wouldn't it be great if a mortgage check came every month instead of a mortgage bill? That's the pitch used by those who sell reverse mortgages. And in this economic climate, it appears to be working.

A reverse mortgage is a special type of home loan that turns part of your home equity into cash. But unlike a traditional home equity loan or second mortgage, no repayment is required until you move. If you think this sounds like a great deal, you're not alone. The number of reverse mortgages backed by the government jumped in March and April by nearly 20% and in April, the government insured the highest monthly total since the program began in 1990, according to Inside Mortgage Finance, a company that provides residential mortgage statistics.

Sign Me Up!
Reverse mortgages may be a hot topic right now, but only a specific group of people can actually qualify for this type of loan; you must be a homeowner, you must be at least 62 years old and you must own your home outright (or be really close to it). And you must live in the home. You can borrow against to $625,500.

However, even if you can qualify for a reverse mortgage this doesn't mean you should. In fact, it's usually a bad idea.

A Very Bad Idea
While Congress lowered the maximum origination fees to 2% on the first $200,000 and 1% on any amount over that, there are also other costs - including an insurance premium and closing costs - that make this a very expensive source of cash. (Read, Reverse Mortgage Pitfalls for more insight.)

For those who are strapped for cash in this tough economy, a reverse mortgage may sound like a great solution. But, in general, avoiding reverse mortgages is the best course of action. A reverse mortgage puts a paid-for home at risk, and the fees are often outrageous. But beyond that, reverse mortgages have the most fraud of any type of mortgage.

If you choose to this option you will have to keep the following in mind:

  1. Avoid Scams
    Several scams have been uncovered in which unsuspecting seniors give sensitive information to strangers over the phone and become victims of identity theft. Never give information to anyone over the phone unless you know them personally.

    Another common scam occurs when a company provides the name of a reverse mortgage firm for a hefty fee, sometimes 10% or more of the value of the property. This is fraudulent because information can actually be obtained for free from the Department of Housing and Urban Development.

  2. Watch for Failing Firms
    Always do your own research into the company you are dealing with before you sign anything. Make sure it is financially stable so that it won't close up shop the day after you sign a big check to get the loan started.

  3. Stay Put
    Don't even think about a reverse mortgage if you aren't going to stay in your home for more than five years. If you move, the fees will be too big a portion of the funds you receive. You would be better off with a home equity loan or line of credit.

  4. Don't Borrow to Invest
    Don't ever borrow money on a mortgage, reverse or not, and then put it in the stock market or other investments in the hope of making more money. Never put your home at risk by using its equity to play the market, buy an annuity, or invest in any other venture. You could end up losing not only your investment, but your home as well.

There are many legitimate providers of reverse mortgages, but this option should not be viewed as free money. Reverse mortgages are rife with fees, leaving homeowners who choose this option paying through the nose to sign away the hard-earned equity they've built up in their homes. (For more, check out The Reverse Mortgage: A Retirement Tool.)

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