How to Avoid Getting Burned by a Reverse Mortgage

As the United States' population has aged, reverse mortgages have grown into a $20-billion-a-year industry. Last year elderly homeowners took out more than 132,000 of these loans, more than a two and a half times increase from just two years before. Hundreds of seniors have complained that they've been victimized by reverse mortgage scams.

Difficulty: Moderately Easy

Instructions

1. Know that a reverse mortgage is not a home equity loan. In the past decade many homeowners have seen the equity in their homes soar, a trend that faltered during the sub prime time mortgage melt down. Still it's not unusual for a senior citizen to live in a home with tens of thousands if not hundreds of thousands in untapped equity. It is possible for an owner to establish a home equity line of credit, borrowing against the value of a home, but payments for that loan have to made a month after its origination. In contrast, homeowners with a reverse mortgage never have to make any payments while they live in their homes.

2. Understand how it works. The program is administered by the Federal Department of Housing and Urban Development and is actually named the Home Equity Conversion Mortgage (HECM) program. Homeowners who are 62 or older can borrow against the value of their homes. They can opt for monthly payments, a lump sum or line of credit. A credit line will give a borrower the most money. A lump sum will provide quick cash, while monthly payments are the most secure. A borrower will receive them for as long as she lives in her home. FICO scores and proof of income don't factor into the granting of these loans. The size of reverse mortgage is determined by the borrower's age, the loan's interest rate and the value of a home. The older the borrower, the more can be borrowed. Lenders recover their loan with when the home is sold, the borrower dies, or moves out.

3. Avoid the most prevalent scam, promulgated by firms calling themselves estate planning services. These companies have high pressure salesmen who sign borrowers to a contract that charges 6 to 10 percent of the total amount borrowed for providing information that is found openly on the HUD website, www.HUD.gov. On a $75,000 loan the fee could be as much as $7500. If a reverse mortgage interests you, call HUD toll free at 1- [phone]. You'll get the name and phone number of a government approved non-profit counseling agency at no charge. The agency will provide callers with information about the program and furnish the contact information for at least three legitimate lenders that are participating in the program.

4. Don't be seduced by the promise of easy riches. The second most prevalent scam is by supposed money managers who convince seniors to take out a reverse mortgage in a lump sum and put it into risky investments that benefit the salesman more than the investor. The whole purpose of a reverse mortgage is to provide an elderly homeowner with working capital.

Tips & Warnings

• Remember a reverse mortgage is a loan that will ultimately have to paid off, either by your heirs upon your death, upon the sale of your home or when you move out to a smaller place or to an assisted living facility. The interest on the loan keeps compounding, so use this tool modesty. In today's uncertain real estate market, you don't want to borrow too much while you're living in your home, in case you might need long term round the clock care in your twilight years.

[mactraks]

on 9/22/2008 Thanks for good information!