3 reverse mortgage red flags borrowers should watch for this August

CBS News

4 hours ago

For retirees who are struggling to make ends meet or are concerned about running out of money, a reverse mortgage can seem like a lifeline. This type of borrowing tool allows seniors to tap into their home equity without the burden of monthly payments, making it an affordable option to consider for those on a limited budget. And, the prospect of turning equity into accessible cash can be especially tempting in today's economy, where unexpected expenses, higher-than-ideal inflation and market volatility can quickly disrupt retirement plans.
But while reverse mortgages can offer access to the cash seniors need, they also carry risks that can catch borrowers off guard if they're not careful. From fees that quietly pile up to restrictions on how the money can be used, there are things that could turn what looks like a helpful financial tool into a stressful burden. And, with interest rates fluctuating right now and housing markets showing mixed signals in different regions, understanding the potential pitfalls of reverse mortgages is perhaps even more important than normal.
Knowing these red flags can help you navigate the reverse mortgage borrowing process more safely and make better decisions about your financial future. So, what exactly should borrowers keep an eye out for this August? Below, we'll detail three red flags to watch for, specifically.
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The reverse mortgage process involves multiple steps, from initial consultation through closing, and red flags can appear at any stage. Being aware of these warning signs now, before you're deep in conversations with lenders, can help you identify potential problems early and protect yourself from predatory practices. Here's what to watch for if you're borrowing with a reverse mortgage this month:
One of the biggest red flags in any reverse mortgage discussion is a lender or loan officer who pressures you to move quickly or discourages you from taking time to think things over. Legitimate reverse mortgage professionals understand this is a major financial decision that can impact your home and your heirs' inheritance, and they should encourage you to take your time.
So, be wary of anyone who says things like "this rate won't be available next week" or "you need to decide today to lock in these terms." While reverse mortgage interest rates do fluctuate, reputable lenders will give you reasonable time to review documents, consult with family members and ask questions. Similarly, avoid anyone who discourages you from getting a second opinion or speaking with an independent housing counselor.
Another pressure tactic to watch for is excessive contact. If a loan officer is calling you multiple times per day, showing up at your home unannounced or continuing to contact you after you've asked for time to consider your options, these are clear warning signs of aggressive sales tactics that prioritize their commission over your financial well-being.
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Reverse mortgages come with various fees, including origination fees, mortgage insurance premiums, appraisal costs and closing costs. A reputable lender will be transparent about all these expenses upfront and provide clear, written documentation of what you'll pay and when.
Red flags include vague explanations of fees, reluctance to provide written estimates or discovery of additional costs late in the process that weren't previously disclosed. Some unscrupulous lenders may also try to sell you unnecessary products like expensive insurance policies or investment products as part of the reverse mortgage package.
As you weigh your options, pay particular attention to the Total Annual Loan Cost (TALC) rate, which factors in all fees and projected interest over the life of the loan. If a lender can't clearly explain this rate or seems to downplay its importance, consider working with someone else. You should also be suspicious if the loan officer suggests ways to get around the Department of Housing and Urban Development (HUD) financial assessment requirements or encourages you to inflate your income or expenses.
Federal law requires reverse mortgage borrowers to complete counseling with a HUD-approved housing counselor before getting the loan. This counseling is designed to ensure that you understand the product and have considered alternatives. Any lender who suggests skipping this step, offers to arrange "counseling" with someone who isn't HUD-approved or pressures you to use a specific counselor they recommend should be avoided.
Legitimate lenders will encourage you to complete counseling with an independent counselor of your choice and will never coach you on what to say during the session. They should also respect the counselor's recommendation if they determine a reverse mortgage isn't suitable for your situation.
Be especially cautious of "advisors" who contact you unsolicited and offer to help you get a reverse mortgage while also selling other financial products. These individuals may not be properly licensed or may have conflicts of interest that prevent them from giving you objective advice about whether a reverse mortgage is right for you.
Reverse mortgages aren't inherently good or bad, but they're complex financial products that require careful consideration and the right professional guidance. By watching for these red flags and taking your time to understand all aspects of the loan, you can better protect yourself from predatory practices and make a decision that truly serves your long-term financial interests. The right lender will encourage your questions, respect your timeline and prioritize your understanding of reverse mortgages over meeting their sales goals.