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Is A Reverse Mortgage Just Another Way To Scam Homeowners?
Posted By Ron On May 10, 2010 @ 4:28 AM In Guest Post,Money,Real Estate | Comments Disabled
 I always thought that reverse mortgages were a way to loot money from senior citizens. But after some careful research on reverse mortgages, I found out that they really can give a helpful boost of income to a struggling homeowner. Since reverse mortgages  are targeted specifically at an older demographic, there are opportunities for abuse, but as long as ethics are followed and meaningful regulations obeyed, homeowners and their equity will remain safe.
Reverse mortgages work like a standard mortgages, but in reverse.
This assures that homeowners understand exactly what they are getting into. The counselors are a neutral 3rd party and have no incentive to persuade anyone to sign any loan papers.
A specific type of reverse mortgage  called a “tenure payment” guarantees the homeowner a monthly payment for life! No matter how long they live, as long as the home functions as their primary residence, they will receive a monthly payment.
The complexity of a reverse mortgage  makes it easy to see how they could be used to take advantage of an elderly homeowner, but government regulations keep the homeowner from getting an unfair deal. To qualify for an reverse mortgage , homeowners must receive mandatory financial counseling to cover all the fine points of the mortgage  and make sure the homeowner understands what they are signing. There are 5 different types of payment options to choose from, plus tax implications that come with an reverse mortgage. There is even a small chance that an reverse mortgage  could affect disability payments. Counselors will make sure that homeowners know about any negative consequences an reverse mortgage might cause.
Another thing that made me feel better about reverse mortgages, is that the lender can NEVER foreclose on the property as long as the homeowner resides there. No matter how long the homeowner lives, as long as it is their permanent residence, they can never lose their home. Also if a homeowner accepts a “tenure” payment, they get that monthly payment FOR LIFE! No matter if they live to 112, as long as the home is their primary residence, they will receive a monthly reverse mortgage payment.
Although there are some positives, there are a couple negative aspects to consider.
Reverse mortgages are much more expensive than other types of loans. The closing costs associated with an reverse mortgage were about 150% greater than the fees from a traditional loan.
Also it is possible (but not likely) that Medicaid and Social Security  payments may be affected by a reverse mortgage. If reverse mortgage payments aren’t spent within the month that they are dispensed, they could accumulate to a level that would not allow Medicaid or SSI eligibility.
Another negative is that reverse mortgages take inheritance away from heirs. If you wanted to pass down your home to your family, an reverse mortgage will affect that. Once the homeowner passes away, the heir will need to sell the home and the revenue from the sale will go back to the lender. The amount that is left over will be kept by the heirs.
Also there have been instances of unethical companies convincing elderly clients to buy annuities or life insurance  with their reverse mortgage cash. This wasn’t illegal, until a couple years ago. A law was been passed in 2008 making it a crime to sell homeowners annuities or other products when taking out their reverse mortgage.
Overall most homeowners that received reverse mortgages reported that they were happy with the outcome. A study by AARP showed that 93% regarded it as a positive experience. The studies show that younger homeowners tend to get the lump sum payment to pay off credit card  debt  or medical bills. While older property owners used it to pay day to day expenses. But I think the key to a very good outcome, is the type of payment option you choose. The “tenure payment plan” could add a level of financial security to an elderly person’s life. Knowing that as long as you live in the house you will “receive” a monthly mortgage payment can give you piece of mind. When you are past your working years, a reverse mortgage can help you live off the wealth you’ve built over your lifetime.
Photo by bamx3 
This article was included in the Carnival of Personal Finance  at Canadian Finance Blog. Thanks for the includsion!
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