Why a Reverse Mortgage is Not a Scam
Financial products are sometimes met with a degree of caution and skepticism. Although this can be a good thing, it can also lead to legitimate products being unfairly treated and painted as scams. This is the case for the reverse mortgage, a financial tool that allows homeowners who are 62 years or older** to convert part of their home equity into cash. So, what’s the deal? How do we know the reverse mortgage product is not a scam? In this article, we’ll explore the definition of a scam, how a reverse mortgage clearly does not fit that definition and the evolution of the reverse mortgage product.
What’s a Scam?
A scam can be defined as a fraudulent or deceptive plan for obtaining money or property, often through a false promise of future financial gain. Scams come in many shapes and sizes, from pyramid schemes to phishing to imposter scams. In general, scams are designed to prey on people's trust, ignorance, or desperation. They promise high returns or other rewards, but in reality, they are just a way to separate people from their money.
In contrast, a reverse mortgage is simply a mortgage loan with special features designed to benefit retirees. It allows seniors to access the equity in their home, while retaining the title to the property and living in the home. The loan amount is typically repaid when the last borrower moves out permanently, sells the home, or passes away.* It can also be partially or fully repaid at any time, with no pre-payment penalty. Reverse mortgages are non-recourse loans, meaning the borrower and their heirs will never owe more than the home’s market value at the time of repayment.
Reverse Mortgages of the Past
Reverse mortgages, like many mortgage products available in the 80s and 90s, did not have extensive consumer protections in place. When the federal government first introduced the reverse mortgage (Home Equity Conversion Mortgage) in the late 1980s, there were a small number of mortgage regulations, as well as several imitation products. The minimal regulation and presence of imitation products led people to believe that the product was a scam, when in fact, it was not.
Present Day Reverse Mortgages
Since then, many regulations and consumer safeguards have been implemented to make the reverse mortgage a sound financial decision for senior homeowners. The fees and costs associated with the loan have been standardized, the loan terms and disclosures are clear, and sales and marketing have stricter regulations.
On top of that, borrowers are required to attend reverse mortgage counseling with an independent third-party HUD-approved counselor, to ensure that they thoroughly understand the loan. At Smartfi®, we pride ourselves on our transparency and integrity, as we seek to make reverse mortgages easier for our partners and their clients to understand.
As you can see, although the reverse mortgage has been criticized and viewed negatively by some, it has been adapted to better serve senior homeowners. As a result, it has become an important financial tool to assist older Americans who are looking for additional income sources or financial retirement options.
Our Smartfi Contributors are made up of a collective group of mortgage industry professionals, who share their personal opinions of the mortgage industry, topics, and various products. These are the express opinions of the Smartfi Contributor, and the article is based on their opinion and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by Smartfi Home Loans, LLC.
Reverse mortgage proceeds may affect the eligibility and payments of Medicaid, SSI and similar program benefits. All clients should be advised to seek guidance on their financial situation with their financial planner/advisor. A reverse mortgage is not suitable for all clients in all situations.
All loans are subject to loan underwriting and must meet all product requirements. Programs can change at any time, please see product handbooks for full underwriting guidelines.
*Borrower must pay property taxes, insurance, any HOA fees and maintain the property. Failure to meet loan requirements will cause the loan to become due and payable.
**Age requirements can be 55 and older, depending on product and state.