Reverse Mortgage Dangers - Making Grandma Homeless

Author:  Rob K. Blake        Published: August 6, 2008

The reverse mortgage got a shot in the arm with the new housing bill becoming law. One of those changes is the increased loan amounts for the FHA reverse mortgage program.

Reverse Mortgage Changes

The FHA reverse mortgage has increase the maximum amounts by $250,000 to $625,000 nationwide. The media reports are all glowing calling this a “gift” or an improvement of some kind.

I disagree…and where’s why.

Reverse mortgage are very complex mortgage programs with ridiculously high fees. But even more importantly, they are used in many ways to defraud the elderly.

Everyone from unscrupulous financial planners to greedy family members themselves are all salivating at the opportunity to get their hands on Grandma’s equity without knowing the loan terms themselves or considering the long term implications.

Typical Reverse Mortgage Scams

Many reverse mortgage cons involve the elderly into other investment scams. Annuities, usually the wrong investment for the elderly, are sold using the reverse mortgage proceeds to fund the purchase. Annuities Grandma is told are a way to turn the cash into a monthly payment stream which sounds good until you realize, Grandma would already be getting a monthly payment stream if she didn’t pull the lump sum out in the reverse mortgage to buy the annuity.

The lump sum reverse mortgage with the new changes offers up even more of the elderly’s home equity for the scammers to covet.

Financial Freedom, a big reverse mortgage seller, was sued in a mortgage fraud case involving reverse mortgages and investment scams.

And mark my words…they’ll get it.

Reverse Mortgage = High Costs & Limited Benefits

I am not really sure and neither is anyone else what the monthly payout benefit to the senior home owner really is since it’s based on an actuarial table anticipating the home owners death.

Many of the terms are hazy but it is reported by the Consumers Union,

“For example, a typical reverse mortgage may provide to the consumer a $300 per month payment with a monthly compounded interest rate of 1%. Over the course of ten years, the borrower will receive $36,000, but by that time she will owe almost $70,000-almost twice as much as she has received.”

This growing balance on a reverse mortgage cobbles up equity like nobody’s business…compounding interest upon interest. This can have disastrous effects when applying for nursing home admittance.

Typically private nursing homes…the good ones…required substantial deposits and even lien the homes of applicants to assure payment. If the equity in the home is all used up…application denied.

Family Members Pushing Reverse Mortgage

I have answered emails and online questions about reverse mortgage products for going on 4 years now and I noticed something recently…most of the questions are from family members!

This leads me to believe cash hungry family members are eye-balling Grandma’s home equity trying to figure out just how to lay there hands on it.

Grandma…don’t fall for it!

Family members don’t know the terms of the reverse mortgage and they could be making Grandma homeless.

For example, if a reverse mortgage is place on the home and Grandma due to illness is placed in a nursing home, the loan can and will be called in full sooner or later. You see a reverse mortgage is for the persons primary residence, so if Grandma goes to live with relatives or moves to a nursing home, it’s no longer her primary residence and lender calls the loan due.

Where will Grandma be then? Homeless. She’ll have to sell the home to pay to pay off the loan.

So don’t believe all the media hype about how great the new reverse mortgage loan limits are…and keep an eye on Grandma.

The crooks are out there gearing up right now!

Good Luck!

Author: Rob K. Blake