Introduction to Reverse Annuity Mortgages
Reverse mortgages (also known as reverse annuity mortgages and home conversion loans) are designed to help those retired households which are "asset rich and cash poor".
The classic, and increasingly common, scenario is that people retire with a single asset: their house. Their only source of after-tax income might be social security payments of around $18,500 for a single person, or $29,500 for a couple. The result, therefore, can be a huge need for additional retirement income, and that's where the concept of the reverse annuity mortgage comes in. It effectively allows you to sell part of your house and use the funds to either supplement your regular income, or spend a lump sum on home maintenance, medical care, or even a big overseas trip.
Essentially, a financial company will give you X amount of money. This can be in the form of a lump sum (home equity conversion option), or as a regular monthly income (reverse annuity mortgage). You then pay back the loan, with interest. And this is the beauty of the concept: you don't physically pay back any money. The debt is built up and is generally only repaid once the house is sold. Hopefully, that's when you've either moved upstairs, or into permanent care.
Reverse Annuity Scams
Getting charged for free information: Some companies have been charging thousands of dollars for information provided free from HUD. Typically these companies charge for this information as part of estate planning services. Seniors signing up with these contracts are unaware of that these firms are charging a fee of 6 to 10 percent of the total amount borrowed. These fees can run into the tens of thousands. HUD has issued a directive to lenders that issued reverse mortgages insured by the Federal Housing Administration (FHA) to stop doing business with these companies.
Pushing reverse mortgages as a way to pay for large purchases: Some companies will try to suggest using a reverse mortgage to purchase the items they are selling, like annuities or insurance.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
Unethical reverse annuity mortgage terms: Some reverse mortgage lenders will slip excessive fees and terms into their contracts. These can have a devestating effect a Seniors equity. In some cases lenders have used shared equity or shared appreciation terms. These fees cost homeowners equity without providing any benefit to the senior homeowner.
What can you do to protect yourself from reverse mortgage scams?
The best way to protect yourself is to use a HUD approved reverse annuity mortgage counselor to evaluate your situation and potential reverse mortgage contracts. The will alert you to any potential problems.
If you suspect that a company is violating the law, let your reverse mortgage counselor know and then file a complaint with your state Attorney General's office or banking regulatory agency and the Federal Trade Commission (FTC) at www.ftc.gov.