Looking Out for Reverse Mortgage Rip-Offs

Reverse mortgages can be a godsend for seniors who are short on cash but have equity built up in their homes. Unfortunately, they can also be a way for unscrupulous operators to help themselves to some of the hard-earned cash retirees have built up over their lifetimes. So how to tell the difference between a legitimate financial opportunity and a reverse mortgage scam?

A little background first. Reverse mortgages offer persons age 62 and above a way of getting money out of their home without selling it. It works just the opposite of a regular mortgage - instead of sending regular payments to the bank and building equity, the bank sends regular payments to you, while your equity in the property declines. You're taking money out of your home in much the same way you originally put it in.

With a reverse mortgage, you can get your payments in any of several ways. You can elect for a lump sum payment, you can choose to receive regular payments for a certain length of time, obtain a line of credit you can tap as needed or opt for "tenure," a series of payments that continue as long as you or your spouse remain in the home.

As compensation, the mortgage company either gets your home once you and your spouse no longer reside there, or is entitled to a portion of the proceeds when the home is eventually sold. That means less to leave your heirs, and less for you in the event you eventually decide to sell the home and move elsewhere, such as into a retirement community.

Examples of common reverse mortgage rip-offs

Reverse mortgages can be an effective way to bring in a much-needed source of revenue during retirement. But sometimes, certain aspects of a reverse mortgage may not be in a homeowner's best interest, even if it doesn't rise to the level of an outright scam. Some things to look out for are:

High fees: Reverse mortgages are costly financial products, even when done legitimately. Homeowners may often pay anywhere from 6 to 10 percent of the amount financed to set up a reverse mortgage, fees that may be hidden within the way the agreement is set up. Although this is just the nature of the product, you need to be aware of whether the potential benefits of a reverse mortgage are worth what you're paying for it.

Bundling other financial products into the deal: Sometimes, a lender will seek to set up a reverse mortgage so that an annuity or other financial products are included as part of the package. These products may have their own hefty fees attached or may not produce returns comparable to what you could easily obtain by investing the money in similar products yourself. Any arrangement that offers to put the proceeds of your reverse mortgage into another investment should be carefully scrutinized and preferably reviewed by an independent financial adviser as well.

Pressure sales tactics: Reverse mortgages are standard products offered by legitimate lenders on an ongoing basis. As a result, there should not be any particular pressure to close a deal by a certain time. Be suspicious if a salesperson tells you that a particular offer for a reverse mortgage program will expire within a certain amount of time - that's a tactic often used to get homeowners to agree to a deal without fully scrutinizing the terms.

Bogus salespeople:Although the FHA, an agency under the Department of Housing and Urban Development, offers a popular reverse mortgage called a Home Equity Conversion Mortgage (HECM), the government does not send out salespeople promoting these products. Persons trying to sell overpriced or downright fraudulent reverse mortgages will try to pass themselves off as government representatives, however - if someone calls on you claiming to represent a government agency and tries to sell you a reverse mortgage, it's a sure sign of fraud.

Taking loans you don't need: Sometimes, salespeople eager for a commission will try to persuade homeowners to take out a reverse mortgage to finance a more comfortable lifestyle even though they really don't need the additional money. The thing to remember is that these people may not have your best interests in mind - so you need to decide whether you really need the money.

Again, a reverse mortgage can be a great way for older homeowners to obtain many of the financial benefits of selling their home without actually selling the property. But you do need to be careful and make sure the loan is in your best interests - otherwise, you could end up paying an awful lot to get your hands on money that's already yours.