The reverse mortgage has gotten a lot of attention lately, but it appears that many seniors just don't trust them. Part of the reason this is true is because there have been stories of a reverse mortgage scam floating about. But are they true, and is it even possible to be scammed?
What constitutes a scam?
It is possible for someone to be unhappy, but not scammed. So when considering a reverse mortgage scam, what would have to happen to make it a bad thing?
Doing a short term reverse mortgage
Except under very specific circumstances, the loan should be used for a long term loan. The fees can be expensive and just don't make sense on a loan you don't plan on keeping.
The scam here is if a mortgage lender is trying to get you to do a reverse mortgage and you don't need one, or won't benefit long term from it. Usually, this is just to generate their paycheck, and that is not a good reason to do the loan.
The exception is if you are trying to avoid foreclosure or other financial hardships. In these cases, a short term reverse mortgage may save you from losing your home or help to do necessary repairs. This is not the norm though, and it should be used cautiously if these are the reasons.
Using proceeds for other investments
It is against the rules for an investment professional to get you a reverse mortgage and then sell you an investment based on the proceeds from the loan. The proceeds from a reverse mortgage should almost never be annuitized, since this defeats the purpose of making your equity "liquid".
Investment professionals are making a double paycheck if they do this, and that is why it is not allowed. It is actually OK if the Investment Company and Lender are two different companies, but it is still discouraged.
Giving money to family
This is a touchy area, but what I am talking about is lending money to family that want to invest it in speculative investments. For example, lending money to a grandchild to flip homes or start a business. This will create hard feelings most of the time. More likely than not, you will find that you will never be repaid.
If you want to gift money to your heirs, it is OK. But try to avoid lending money that you need, for someone else to invest. What most consider acceptable is to pay for a college education or help with a down payment on a home.
The reverse mortgage itself is not a scam, but how the money is used can be. Keep in mind that the equity in your home is there to help you through retirement and lending it or giving it away will just leave you short if you don't get it back.
The best way to avoid a reverse mortgage scam is to make sure the money (and loan) benefits you, not the people asking you to do it. There is nothing wrong with the lender making a buck, or you being generous and gifting the money. But the bottom line is it should benefit you the most. After all, it is the last "savings" that most people have. It should be guarded vigilantly.
After many years of originating loans for seniors, I have come across a reverse mortgage scam once or twice. It is never the fault of the reverse mortgage, but more the person doing the loan, or family members that want some of the money. See more examples of things to look out for on our site.
What constitutes a scam?
It is possible for someone to be unhappy, but not scammed. So when considering a reverse mortgage scam, what would have to happen to make it a bad thing?
Doing a short term reverse mortgage
Except under very specific circumstances, the loan should be used for a long term loan. The fees can be expensive and just don't make sense on a loan you don't plan on keeping.
The scam here is if a mortgage lender is trying to get you to do a reverse mortgage and you don't need one, or won't benefit long term from it. Usually, this is just to generate their paycheck, and that is not a good reason to do the loan.
The exception is if you are trying to avoid foreclosure or other financial hardships. In these cases, a short term reverse mortgage may save you from losing your home or help to do necessary repairs. This is not the norm though, and it should be used cautiously if these are the reasons.
Using proceeds for other investments
It is against the rules for an investment professional to get you a reverse mortgage and then sell you an investment based on the proceeds from the loan. The proceeds from a reverse mortgage should almost never be annuitized, since this defeats the purpose of making your equity "liquid".
Investment professionals are making a double paycheck if they do this, and that is why it is not allowed. It is actually OK if the Investment Company and Lender are two different companies, but it is still discouraged.
Giving money to family
This is a touchy area, but what I am talking about is lending money to family that want to invest it in speculative investments. For example, lending money to a grandchild to flip homes or start a business. This will create hard feelings most of the time. More likely than not, you will find that you will never be repaid.
If you want to gift money to your heirs, it is OK. But try to avoid lending money that you need, for someone else to invest. What most consider acceptable is to pay for a college education or help with a down payment on a home.
The reverse mortgage itself is not a scam, but how the money is used can be. Keep in mind that the equity in your home is there to help you through retirement and lending it or giving it away will just leave you short if you don't get it back.
The best way to avoid a reverse mortgage scam is to make sure the money (and loan) benefits you, not the people asking you to do it. There is nothing wrong with the lender making a buck, or you being generous and gifting the money. But the bottom line is it should benefit you the most. After all, it is the last "savings" that most people have. It should be guarded vigilantly.
After many years of originating loans for seniors, I have come across a reverse mortgage scam once or twice. It is never the fault of the reverse mortgage, but more the person doing the loan, or family members that want some of the money. See more examples of things to look out for on our site.
