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(originally published August 2008)
Today’s rising costs, coupled with increasing foreclosure and unemployment rates, have resulted in more and more Hoosiers living paycheck to paycheck. In addition, uncertainty in the stock market may have some looking elsewhere for investment opportunities. With these combined factors, unfortunately, the current economy is a breeding ground for scammers looking to capitalize on vulnerable consumers already feeling financially insecure.
One area of concern in Indiana and nationwide is reverse mortgage fraud. A reverse mortgage is a loan allowing people who have a great deal of equity in their home to convert that equity into funds. These funds can be paid to the homeowner in a lump-sum payment, a monthly income payment, or an available line of credit.
Although reverse mortgages are a legitimate lending option for homeowners that meet a very specific set of criteria, more and more unscrupulous mortgage brokers are using the little-understood finance option to defraud their trusting customers.
Reverse mortgages are only for people who are at least 62 years old. And in order to be eligible for a reverse mortgage, they need to have a great deal of equity in the property they use as a primary residence. Because of these requirements, reverse mortgage scams are often geared toward senior homeowners who have growing medical and credit card debt, and who probably have a small pension or are living solely on Social Security. Adding to the danger is a very detailed application process, which results in scammers having access to extensive details regarding one's personal financial history and assets.
Fortunately, housing legislation (H.R. 3221) passed by Congress and signed into law by President Bush this summer included several provisions that take aim squarely at the reverse mortgage sector. The new legislation protects consumers by prohibiting brokers from requiring their customers to buy annuities or other financial products when pursuing a reverse mortgage. It also requires mortgage brokers to follow counseling protocols and practices that promote independence and quality counseling.
For the right person — and the right home — a reverse mortgage has many benefits. The primary benefit is the ability to gain access to home equity, and not have to make monthly payments for these non-taxable funds. And unlike all other loan types, there is no monthly or periodic payment required. The loan does not have to be repaid until the home is sold, or until the homeowner dies.
By selecting a trusted and reputable mortgage professional to assist with your reverse mortgage, you’ll improve your odds of having a positive experience. But consumers should still research and understand this type of financing before taking action. The costs associated with these loans can be high. Homeowners should also consider that they may be diminishing the value of the estate that they plan to pass on to their heirs.
For example, a homeowner could take out $6,000 in principle against his home, incurring per-day interest on that principle. The next year, he would then incur a per-day interest, on top of the money taken out in year two. With today’s current rates, that homeowner would be losing $10,000 equity. And the next year, he would lose another $10,000, plus another year’s worth of per-day interest. It really adds up.
For more information on reverse mortgages and a detailed explanation about how they work, go to http://www.indianainvestmentwatch.com/. You can also call the National Reverse Mortgage Lenders Association (NRMLA) toll-free at 1-866-264-4466.
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