The Reverse Mortgage Scam

As our population ages, there seem to be more offers for reverse mortgages. A reverse mortgage is a loan that allows senior citizen homeowners to access the equity in their home in the form of payments from the lender. The loan is then paid back when the owner dies or sells the home, or leaves for more than a year (such as to a nursing home).

This seems like a nice insurance policy for younger homeowners knowing when they reach a certain age they can then tap their equity without having to make payments for it. But the real costs of these mortgages is the fact that the homeowner most likely won't be able to pass the home along to their heirs, since the home will have to be sold off to pay off the debt of the reverse mortgage. If the heirs want to keep the home, they'll have to pay off the debt themselves. A home that may have been in the family for generations could be lost.

Borrowers are still required to pay insurance and property taxes, and may be in default of the reverse mortgage if they fail to do so. However the payments received from the reverse mortgage can be used for this purpose, or for any purpose.

Reverse mortgages tend to have higher costs associated with them, because the bank is taking a risk that the property market will not tank and that the house will still be worth something when it is time to sell. Although these fees have recently come down, they can still equate to 2% of the home's value. The borrower will also be paying higher costs when the loan is to be paid off because of compounding interest. The lender charges interest on the payments it makes, and adds to that balance each month. This saps the home of equity that the borrower or their heirs might have taken advantage of.

Its better not to borrow, but if an older homeowner really does need to borrow, there are much better products available. A simple loan or line of credit would be a better way to capitalize on a home's equity without sapping it through compounding interest.