Swanson, FBI are right to urge caution.
For a cash-starved senior citizen, the opportunity to tap into hundreds of thousands of dollars in home equity can be irresistible. That’s why reverse mortgages are becoming more popular, and also why consumer groups and law enforcement officials are warning about a new frontier for scams and fraud.
Today 81 percent of seniors own their own homes and account for a total of more than $4 trillion in home equity, according to the Government National Mortgage Association (Ginnie Mae). By 2030, that figure could grow to $37 trillion. Reverse mortgages are a way for homeowners 62 or older to get at all or most of that equity tax-free without selling their homes. Even better, there are no monthly interest or principal payments during the life of the loan, making it seem like free money. It isn’t.
There are important caveats, which is why FBI Director Robert Mueller and Minnesota Attorney General Lori Swanson, among others, are warning consumers to be wary.
One caution is that reverse mortgages can be more costly and less attractive than they appear in promotional materials. Benny L. Cass, an attorney in Washington, D.C., provided this example for the Washington Post:
“Your house is worth $500,000, and you have a $100,000 mortgage. You obtain a $300,000 reverse mortgage, which pays off your existing loan and provides you with about $200,000… In 10 years, assuming that your house appreciates 4 percent a year, it will be worth about $740,000. But even if the interest rate is only 6 percent, at the end of 10 years the loan amount will have increased to $537,000. … If at the end of those 10 years you want to downsize and buy a smaller home, or if you plan to leave your house to your children, the remaining equity — about $200,000 in our example — may not be sufficient for your needs.”
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