Are reverse mortgages a scam?

By Alain Valles,
MBA, CRMP, CSA

Home Equity Conversion Mortgages (HECM), more commonly known as reverse mortgages, were authorized by President Ronald Reagan in 1987 and are federally insured by the Department of Housing and Urban Development (HUD). Hundreds of thousands of people aged 62 or older have benefited from this program, which has provided them the opportunity to remain financially independent.

Yet, despite a 27-year history of helping senior homeowners, there still remains confusion over whether reverse mortgages actually work. A client recently shared that her daughter had heard reverse mortgages are a “scam.” She wasn’t sure why this was so, but had “heard it somewhere.” Fortunately, once the daughter learned about the merits of a reverse mortgage, she was in agreement with her mother that it was the best option.

This is a recurring pattern of seniors, adult children, attorneys, estate planners, and real estate agents, to name just a few, who have a poor opinion about reverse mortgages, but don’t really know why.

To help dispel this unwarranted negative perception, here’s a short summary of the top seven myths about reverse mortgages:

1. The lender will own your home – FALSE!

You continue to retain ownership of your home. Reverse mortgage borrowers may remain in the home for as long as they wish subject to paying the property charges, which include real estate taxes and insurance. When the home is sold any profit is yours.

2. Your heirs must pay the loan back – FALSE!

A reverse mortgage is a non-recourse loan and you do not sign personally. The lender is repaid from the sale of the property. Your heirs are not responsible for paying back the loan.

3. You need income and good credit to qualify – IT DEPENDS!

As of April 27, 2015, all borrowers must provide their income information and have their credit profile reviewed. For those who do not meet the guidelines the lender will “set aside” future amounts to pay the property charges, subject to the available reverse mortgage loan amount.

4. You must make monthly payments – FALSE!

There are never any mandatory monthly principal or interest payments. However, you may make a payment at any time with no prepayment penalty.

5. Your home must be debt free to qualify – FALSE!

You may have a mortgage on your home that will be paid off with the reverse mortgage.

6. Only borrowers who need cash “today” can benefit – FALSE!

More and more financial planners are incorporating reverse mortgages as an estate planning tool for future financial security.

7. Reverse mortgages are expensive – IT DEPENDS!

A reverse mortgage may cost more than a conventional loan. However, it is much less expensive than the cost of a real estate agent commission if you are forced to sell your home, or the emotional cost of relocating to a new property.

Not everyone should obtain a reverse mortgage. But everyone should know the basics. For those who may be considering a reverse mortgage or if your profession includes serving older individuals, I recommend investing 20 minutes to gain insight about how reverse mortgage are aiding retirees to remain independent and achieve their life goals.

Alain Valles, CRMP and President of Direct Finance Corp., was the first designated Certified Reverse Mortgage Professional in New England. He can be reached at 781-724-6221 or by email at av@dfcmortgage.com.