Are reverse mortgages a Scam or a Good Deal?

Posted: March 17th, 2009 | Author: Joe | Filed under: Real Estate, Scam | Tags: Bad deal, Reverse Mortgage, Scam | 12 Comments »

Reverse mortgages have gotten a lot of buzz over the past 6 years or so, but are reverse mortgages a good thing?

First of all, to answer that question, you need to know exactly what a reverse mortgage is. A reverse mortgage is a home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can then be paid to you.

Sounds great, right?

Well, maybe not.

There’s the little matter of paying this money back. You see, it’s not truly the reverse of traditional mortgage. If it were, you would “loan” the bank your equity stake in the home in exchange for monthly payments to you until that equity “loan” was paid off. At that time, the bank would lay claim to the full value of the home. But in a reverse mortgage, you get to live in the home as long as you can make tax and insurance payments on the home. When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

There are literally hundreds of disreputable individuals and companies who use reverse mortgages as a scam. They load them up with so many fees, that you really end up with very little left in payments and you or your heirs may even owe more once the home is sold!

One such company, Financial Freedom Senior Funding Corporation, was hit by a lawsuit for their hard-sell tactics. The suit essentially alleges that they scammed seniors out of their homes and equity, pushing them to use the money for the “special things you’ve always wanted to do, such as travel or hobbies.” Financial Freedom Senior Funding Corp. also encouraged seniors to take out the maximum allowed under the law, regardless if it was wise, and even engaged insurance agents to sell insurance products on top of the reverse mortgage, tacking on more fees.

Despite this, the company sports a rating of C from the BBB and has 0 complaints in the past 36 months.

It sounds like reverse mortgages are not such a good deal. I suppose they would be for seniors who have no heirs and don’t plan on ever selling their home, but that may not be the most responsible thing to do.

For more info on Reverse Mortgages, head over to the U.S. Department of Housing and Urban Development website.

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