Stealing Grandma's Home: The Reverse Mortgage Scam

There's a high probability you have seen the commercials and ads on YouTube with Tom Selleck trying to tell you that getting a reverse mortgage isn't such a bad idea. I wouldn't be here if I thought reverse mortgages took advantage of any American senior. And I've had a lot of people request that I make this video so I'm going to do my best to make it as thorough and comprehensive as possible. I have researched the topic quite a bit and I have also scoured through some comment sections of other reverse mortgage videos to try and answer some of the questions and address some of the things that maybe some of the other videos don't address. So the first thing I'm going to start off with here is a question I got from one of my viewers and then I will dive into what exactly reverse mortgage is and all of the other details from there. So here's a question from one of my viewers who says that a friend of mine lives with her mom who is 95 years old and is still alive and well and active. She got a reverse mortgage on her house around 15 years ago and the house has increased substantially in value since that time, probably more than double since they bought it 10 or so years before that. But her daughter has no idea what that means for her and or the bank holding the mortgage. She doesn't know very much about her mom's finances to my knowledge and I don't know what my friend can or should do when her mom passes and I don't think she does either. The questions are things like who owes what to whom in the event of her mom's death in this scenario? What is a reverse mortgage? Are they a scam? Is it a rip-off? I've heard a lot of bad things about it. Do they actually help anyone? What happens when the house increases or decreases in value? What happens if you sell? What happens upon the death of the person etc etc? I hear a lot of stories about them, many more bad than good. So I'd rather hear it from you. So I'm going to do my best to give you my most honest and factual take on reverse mortgages. So let's first talk about what is a reverse mortgage. A reverse mortgage lets homeowners convert their home equity into cash and unlike traditional mortgages there are no monthly mortgage payments. However, you can make monthly mortgage payments which we'll get into later in this video but it's not a requirement. But repayment of the loan that you get is due when the borrower either dies, sells the home, or moves out. And reverse mortgages are pretty commonly used by retirees with limited income but have substantial home equity. Essentially you are house rich and cash poor. But there are other ways that people are using reverse mortgages these days as well to fit into their retirement plan that aren't necessarily out of desperation which we will also talk about. So how it works is homeowners can receive either a lump sum of cash, you can receive it in monthly payments, or you can have it as a line of credit. And the amount depends on your age, the value of your home, the amount of equity you have built up in your home, and whether or not the home is paid off. And one of the most important things that people who are considering getting a reverse mortgage need to understand about it up front is the costs involved. Because this is one thing that a lot of people overlook. You're going to have origination fees, you're going to have monthly maintenance fees, and you're going to have a higher interest rate than what a typical mortgage rate is today with compounding interest. And you're also going to have mortgage insurance premiums. So let's go over some of these fees in detail and how they might actually work out. Here's how much the fees of a reverse mortgage would be based on a $400,000 home value, which is right around the median home value right now in the United States. First of all, there are FHA limits. So you would be paying 2% of the first $200,000 of the home value, which is $4,000. Then you would pay 1% of the remaining $200,000, which is an additional $2,000. That's a total of $6,000 and $6,000 is the maximum allowed by FHA. So if you're getting a reverse mortgage on a house that's worth more than $400,000, you still should be capped at this $6,000 limit. Then the second thing is you're going to have FHA upfront mortgage insurance premiums. This is required by the government agency HUD, the housing and urban development for reverse mortgages, and it's 2% of the appraised home value. So if it's $400,000, that's an additional $8,000 in mortgage insurance premiums. The third thing you're going to have to pay for is appraisal fees. This is going to cost you about anywhere between $500 to $700. The next thing is you're going to have title insurance and escrow fees. This is going to cover title search, title insurance, and closing costs, which is going to cost you somewhere in the neighborhood of around another $2,000. Then when you get a reverse mortgage, you are also required by law to have a HUD mandated counseling session. And this typically costs about $120 to $200. So let's say $150. And then moving forward, after you get the reverse mortgage, you're going to have a monthly servicing fee. That's about $30 to $35 per month. That's added to your loan balance and over 10 years, you know, let's say it's $35 a month times 120 months. That's an additional $4,200. So right away, your upfront costs like your origination fee, your mortgage insurance premiums, your appraisal title and escrow fees, and the counseling, you're already looking at almost $17,000 at $16,750. So just signing the paperwork and getting the reverse mortgage from the get-go is pretty expensive. It's not cheap. And here's the other thing that a lot of these reverse mortgage companies don't tell you is all of those upfront fees that we just talked about are typically rolled into your loan rather than paid out of pocket. So they reduce the net amount that you receive up front. So say you're doing a reverse mortgage and they're supposed to get $60,000. If your upfront fees are $17,000, they're going to take that $17,000 out of that $60,000 that they're going to give you up front. You're actually going to get less than you thought. And I really wanted to spend a little time there on the fees with the reverse mortgage, because they are expensive and they do come out of the money that you're going to receive right away, which a lot of people don't really understand. And they miss that when they sign up for one of these reverse mortgages. Some other things you must know about a reverse mortgage is that you have responsibilities. You now have a lender that's going to be telling you what to do with your property. You still have to pay your property taxes, your homeowner's insurance, and any HOA dues, if there are any. And failure to pay any of these can be a breach of contract in your reverse mortgage and can actually result in the reverse mortgage lender foreclosing on your property. And this is where it becomes kind of scam territory because some of these lenders are very predatory and will look for any reason or any slip-up, any default in your contract, even when it comes to yard maintenance, for example. They can have a maintenance clause in there saying you have to keep your yard in a certain condition, something like that. And say if you're an elderly person that is handicapped or bedridden or whatever, you're probably not going to be able to keep up with that maintenance. And so they can end up actually foreclosing on your house just because the yard is overgrown. When it comes to repaying a reverse mortgage, it's typically repaid at the time the home is sold. And a lot of people get these going into it with the mentality that I am going to have this reverse mortgage and I'm going to die in this house and the reverse mortgage will be paid off when the house is sold, whenever my heirs inherit this house. But if you do decide to sell the house before you pass away, then it will need to be paid off before you die. Now in order to get a reverse mortgage, there are some eligibility requirements. First of all, you must be 62 years or older. You do not qualify for a reverse mortgage if you are younger than this. You must own a home. The home must be your primary residence. You can't do this on an investment property or a second home. You must have substantial equity and you're required to meet with a reverse mortgage counselor. There are also a few different types of reverse mortgages, which we're not really going to get into because we're kind of just going to cover the most common one, which is the home equity conversion mortgage. This is what most people get, but there are also proprietary ones from private lenders. And there are also single purpose from nonprofits and governments that are for limited uses like repairs or taxes. So we'll go over the most common one, which is the home equity conversion mortgage. It's a super clear day up here today in Tiburon. You can see San Francisco across the Bay. Last few days, it was completely shrouded in fog. Today's super clear. So now that you know what a reverse mortgage is and you know the costs involved with getting one, let's go over a couple of real world examples of how this would actually work for someone getting a reverse mortgage. Here's the first scenario. A retired homeowner who needs an income boost. Here's a woman that's 70 years old. The value of her home is $500,000 and she has no mortgage. Her monthly income from social security is $1,800 a month. Her monthly expenses are $2,800 a month. And so she needs an extra $1,000 a month in order to keep up with the cost of living, which is probably a scenario a lot of people considering a reverse mortgage are facing right now. So her reverse mortgage strategy would look like this. She takes out a home equity conversion mortgage, the most common type of reverse mortgage. She chooses the monthly payment option for $1,000 for 10 years. Her line of credit is set at $120,000 total with no payments required from her. She continues to live in the home, which she has owned for a long time. So what did this person accomplish? Well, she closed her income gap without selling or downsizing the house. And when she passes away the house, the reverse mortgage balance of about $120,000 plus interest, which you don't know what that's going to be in 10 years, it's going to be significantly more, probably more like $150,000 to $170,000 is repaid from the home sale proceeds. So for example, if you're going to inherit a house from somebody who has a reverse mortgage, say you were going to inherit this exact house, you're going to have closing costs, selling fees for that home, plus paying off the reverse mortgage. So even though the home has $500,000 in equity, you might end up only netting $275,000 from the sale after everything's all said and done. I'm going to go over another strategy in a little bit here in this video, that's more about saving money on taxes, more than it's about just needing money to survive on. This is actually a strategy that people use. But first I want to go into some of the downsides of getting a reverse mortgage, because one of the biggest concerns I see is people want to know, is it a scam or not? Well, technically it's not a scam because it's legal for you to get it, but it's about as close to a legal scam as it can be depending on the lender. So one of the biggest downsides, which we've already covered, are the high costs and fees associated with getting a reverse mortgage. You have all of the costs I mentioned before, the origination fees, the closing costs, the mortgage insurance premiums, things like that. You're going to be looking at at least $15,000 in most cases, if not more, that's coming out of the amount that they're going to give you. The next big downside to getting a reverse mortgage is the eroding home equity. Because you're not making payments, interest accumulates on the loan. So over time, this drastically reduces the equity left on the home and sometimes strips away the equity entirely if you don't have that much to begin with. Because the problem is the majority of people who get a reverse mortgage do it because they need the cash. There is a retirement strategy, like I said, we're going to go over it, but that's not what the vast majority of people use reverse mortgages for. They typically use it because they need money now. And that's why the biggest risk of getting a reverse mortgage is the risk of foreclosure. Because even though you don't have any monthly mortgage payments, you still have to pay your property taxes. You still have to pay your homeowner's insurance. You still have to pay your HOA dues and failure to keep up with any of these, including the maintenance of the property can result in a foreclosure from your reverse mortgage lender. And that is the business model for some of them. So you have to be very careful on who you choose. And I'm not giving any recommendations here on who you should choose as your lender, but make sure you thoroughly check out their reviews, talk to other people that have a reverse mortgage and see how it's going for them. See if they're having any trouble, stuff like that. Do your due diligence. And one of the other big downsides of getting a reverse mortgage is the impact on your heirs because the loan must be repaid when you die or you move out of the house. Then depending on how much equity you have in the home and how much interest has accrued on that loan, there might not be a whole lot of equity left on the house. Now they're not allowed to ever have the balance of the reverse mortgage go beyond what the home's value is. So it's not like you're going to pass down the home to one of your heirs and they're going to have to owe a hundred thousand dollars when they sell the house to the reverse mortgage lender. It's not going to be like that, but they will essentially get nothing if the balance is too high and the equity is too low. Another downside is the eligibility requirements of being 62 years and older. Usually you need to have a significant amount of equity of 50% or more. However, depending on your age, if you are much older, say you're in your eighties or nineties, there is a possibility that your lender will only require you to have maybe 30 or 40% equity in the home for you to qualify for a reverse mortgage. This next downside of having a reverse mortgage is a big one because what you're essentially doing is you're giving up the flexibility of your home, especially if it's paid off. Because once you start a reverse mortgage, you might have fewer options for refinancing, selling, or downsizing that home without triggering a repayment and getting a reverse mortgage. And then deciding a year or two later, you don't want it anymore. It can be just as costly as people who buy a home today and decide they don't want that home anymore and decide to turn around and sell it two or three years after buying it. And because of buyer's remorse and end up taking a significant loss on the house because they sold it for less than they paid for it. At the same time, they had to pay closing costs and selling costs on that house twice within just a few years. Also another major downside to reverse mortgage is that they are very complex and there's a lot of fine print. And if you don't really fully understand what you're getting yourself into, you can end up in some real financial trouble. You know, a lot of borrowers don't fully understand how the loan grows and how the interest accrues over time. And people don't understand what happens if they move out of the property. People don't understand the tax implications. It can even have an impact on whether or not you will qualify for Medicare or Social Security payments, things like that, depending on how much the monthly payment you are getting from your reverse mortgage are, or if you decide to go for the lump sum option. So it can have other ramifications that you might not have thought about. The whole reason a lot of people get a reverse mortgage to begin with is because they need the cash without selling the house. If you're getting the cash from the reverse mortgage, but now your Social Security payment just got chopped in half, well, that's going to cause you some major distress as well. And probably one of the largest downsides of getting a reverse mortgage is the sales incentives. A lot of people who are trying to sell you a reverse mortgage are doing it for their own benefit, not for yours. There's commissions that are paid on these things. These lenders make a lot of money off of reverse mortgages. And sometimes people are pressured into unnecessary upgrades or financial products that are tied to reverse mortgages that you don't actually need, like a upsell sort of thing. But one thing that you should know is that there is a small buyer's remorse period if you decide to get a reverse mortgage. Borrowers can actually cancel their reverse mortgage within three business days of signing. So say you do it and you're losing sleep over it for a night or two and you think you made the wrong decision. That's your gut telling you you probably did. Well, you can rescind that reverse mortgage and cancel the whole thing and thank yourself later for doing it most likely. Now, that was kind of like my opinion of it shining through a little bit there because personally, I don't think most people should ever do this. Only in very, very few scenarios does it probably make sense to get one. And one of them is the strategy we're going to talk about right now, which is a retirement strategy in order to save some money on taxes, because I'm all about that. I love saving money on taxes and any strategy that allows you to do that, I think is worth taking a look at. And keep in mind, this is probably only going to be for wealthy people that really don't need the reverse mortgage and are just using it for tax saving purposes. And this is how something like this would look. Here's a guy, 65 years old, who has a home worth $800,000, no mortgage on the property, has retirement savings of $1.2 million in a traditional IRA, and he's planning to do a Roth IRA conversion over the next five years. So here's the strategy. He takes out a reverse mortgage line of credit for $300,000. He doesn't withdraw initially, letting it grow at 5% a year. In year three, after converting $100,000 from his IRA to Roth, which is a taxable event, he uses $10,000 from his reverse mortgage to pay down interest on the reverse loan. That $10,000 payment increases his credit line by $10,000, which he can access tax-free in the future. And so the mortgage interest deduction offsets income from the Roth conversion, reducing his tax bill and avoiding higher Medicare premiums. So the outcome of this is he was able to preserve his investment portfolio, reduce taxes, and build a growing tax-free cash reserve in his line of credit. But as you can see, this is a pretty advanced financial maneuver. And if you didn't understand what I just said, you're not ready to do this, at least not without the help of a financial planner. So this can be a scenario where getting a reverse mortgage makes sense. And notice how this guy, he chose the line of credit option. He did not choose the monthly payment option or the lump sum option because he didn't need the money. And so that's the fundamental difference between somebody using this because they're desperate for cash or because they're using it to try to save some money on taxes. You can tell just by the scenario and just by the way they use the reverse mortgage on someone's financial situation a lot of times. You need to be honest with yourself and assess which camp are you in and what are you really using this for? Some of the other advanced strategies that people use reverse mortgages for are things like the growing line of credit. Because the line of credit grows at the same rate as the loan balance, which can actually outpace the home's value over time. So this acts as a hedge against falling home prices, potentially allowing the homeowner to withdraw more than the home's worth tax free. Because when you take on debt, you don't ever have to pay money on that. When you borrow money, you don't pay tax on debt that you owe. And that's how this can be a good tax strategy in retirement. This kind of goes along with the buy, borrow, die way of doing things and not paying tax as you get older. And remember earlier how I said that there are no payments required on a reverse mortgage. They are optional, which means you can actually make payments even though you have a reverse mortgage. And this would look something like this. Homeowners can actually choose to make payments, especially interest payments, strategically after Roth conversions, tax strategy, or following required minimum distributions, which is also a tax strategy because as you get older into retirement, you are forced to take a certain amount of money out of your retirement accounts each year by law. So this tactic can actually reduce your taxable income, your Medicare surcharges, and allow mortgage interest deductions. But this is very financially savvy stuff and you really have to know what you're doing with this. And I just don't think most people are in the position where this is why they're considering doing a reverse mortgage. Everybody I've ever talked to, including during my real estate career, was considering a reverse mortgage because they needed money in retirement, not because they were trying to save money on taxes. That's a rich person's problem. So are there any advantages at all to getting a reverse mortgage? Well, there are a couple, but not very many. Really the biggest advantage, if you're somebody who's doing it because you need the money, is it's going to be your lifestyle and investment advantages. Things like eliminating your principal and interest payments, those are going to reduce your living expenses substantially. Because for basically everyone, your housing payment is your number one expense. And if you still have a house payment in retirement and you have a lot of equity on the house, this might be a reason to do it, especially if you are not planning on passing your home down to anybody after you die. Another major advantage of the reverse mortgage is it frees up cash in order to avoid withdrawals from your retirement accounts, which allows your investment portfolio to grow more. And especially if we hit a bad year in the stock market, you could take money from the reverse mortgage instead of withdrawing from your retirement fund. Because when you're making withdrawals in a year that the stock market is going negative, you're probably never going to recoup those losses, especially in retirement when you're not contributing to the account anymore. So that's another strategy that you can use a reverse mortgage for, is to avoid taking money out of your stock portfolio or 401k when the stock market isn't having a good year. The last thing I want to do here is go over some viewer stories, things I found in comment sections, not of my videos, but of different reverse mortgage videos, because I've never actually done a comprehensive video on this before. This person says, one thing to remember is if you are a homeowner and you end up with a major health issue, because most people do not have long-term health insurance, this may cause a major financial problem. My grandmother had a she owned her home and ended up in a nursing home. And even though she was on a very small fixed income, couldn't qualify for financial assistance because she had a home. So he says a lot of people need assisted living and even nursing care in 1993 for his grandmother was $8,800 a month. I don't even want to think about what it could be now if that's how much it costs 30 years ago. Here's a comment from somebody else that says, one reason to have a reverse mortgage is that you want to stay in the home. You are close to family and selling and moving is not an option. I think there needs to be a push to making reverse mortgages more appealing, pass proper legislation so people can enjoy what they have built in those communities that they have been in for decades. That's a good idea. It's a nice thought. And it is maybe a legitimate reason to get a reverse mortgage. But once again, you are susceptible to the predatory lending aspect of this, especially if you're not doing your due diligence or you never saw a video like this one. Some people just see that Tom Selleck video and say, Hey, where can I sign up? You think it's an accident that these companies use trusted actors and people that have been in the movie business for 50 years? Of course not. People see them and they remember all the movies and TV shows that they were in, that they loved. And they don't think about it as like this person's just trying to sell them a reverse mortgage. They look at it as like, Oh, this is somebody I trust. So if they're saying it's okay, then it must be okay. Now here's one last viewer comment that says, I hear what you were saying, but with the cost of housing, it's cheaper to get a reverse mortgage. Also, I have seen this reverse mortgage save several families. I did a signing for one lady who lost her job at the age of 63, who was looking and looking, but couldn't find a job. She did the reverse mortgage so that she would not lose her home while she tried to rebuild her life. So this must be from a salesman, somebody who actually sells people reverse mortgages. And he only talked about the good things that happened right there. And none of the potential pitfalls that this person could fall into now that they have the reverse mortgage, which I think I did a pretty thorough job of covering here in this video. You know, for me, the final conclusion and analysis on this guys is if you don't need one, don't get it. If it's your last resort financially, and it's the only way you can afford to live and stay in your home, and you're not planning on passing along any inheritance to any of your children or grandchildren, then it's a maybe. And honestly, the best person to use it is someone who doesn't need it. Like a lot of other financial instruments, somebody who's looking to use it strategically just to save money on taxes and retirement because they are wealthy and have too much money, which 95% of the people who get a reverse mortgage do not fall into this category. So that's why a lot of people talk about how reverse mortgage is a scam, because there's a lot of predatory lending. There's a lot of people that get it that don't understand how it works. And a lot of people get one out of desperation, sign now and worry about it later. And so for that reason, I would say the vast majority of people should probably stay away from getting one, because if you think you need one, then you're exactly the kind of person who probably shouldn't get one. So I hope this video helped you. If you know anybody who's planning on getting a reverse mortgage, please make sure you share it with them so they can thoroughly review all of the pros and cons and things that go along with it. And they can fully understand what they're getting themselves into. So if you enjoyed this video, make sure you subscribe to the channel. And if you don't want to wait for my next video to come out, check out this one on the screen right over here, and I'll see you in the next one.