Most senior citizens are living on fixed incomes, which means there is hardly any room to deviate from their established budgets. If an emergency comes about, the sudden panic can make it easy to fall victim to predatory lending schemes. Knowing what these schemes are, how to avoid them, and what alternatives exist can prevent even more panic and stress in the future.
But Why do some lenders and scam artists target seniors?
Unfortunately, many senior citizens do not completely understand the terms of a financial agreement or they are presented with something that they are led to believe will get them out of a financial bind. As stated before, most senior citizens are living on fixed incomes and that means emergency or “tight money” situations can drive them toward those “too good to be true” offers.
The inability to understand all terms of a financial agreement can also result in a bad deal or a bad lender taking advantage of them. For some reason there is this misconception that senior citizens have a lot of money in bank accounts and hidden under their mattresses, which is typically not true.
So below are three common finance schemes out of many that target senior citizens:
1. Homeowner and Reverse Mortgage Scams
The reverse mortgage can be a very good idea. The premise behind a reverse mortgage is to use the equity in the home to put some money in a person’s pocket. There are many senior citizens that use legitimate reverse mortgages to supplement their social security, pay medical expenses, make improvements to their home, or travel to those destinations they always wanted to travel to.
For a senior citizen to qualify for a reverse mortgage, they need to be 62 years old, own their home free and clear or with a very low mortgage balance that can be paid off with the reverse mortgage proceeds, and they must live within the home.
As for how it works, the reverse mortgage pays the homeowner, which makes it much different from a home equity loan. There are no monthly payments at all. The money, including interest and other finance charges, is repaid when the home is no longer the primary place of residence or when the home is sold.
Overall, the reverse mortgage seems rather cut and dry.
However, a couple of things can happen when a senior citizen is the subject of a reverse mortgage scam. First, the fraudster will send a personalized letter to property owners. This letter looks legitimate, but it is not. In the letter, the fraudster states the value of the home according to the county auditor’s public records and offers to reassess the property value for a fee.
Second, the fraudsters may offer the homeowner a free house at another location if they hand over the title to their property. If a “reverse mortgage” was acquired with the perpetrators, moving out of the home means that the money paid from the reverse mortgage must be paid back and then the senior finds out that there may be no free home or that the free home is simply a rental.
To avoid this scam, it is important to never respond to solicitations. Senior citizens should always contact the reverse mortgage lender themselves.
2. Beware the Financial Advisor
While there are many reliable financial advisors, there are some that take the opportunity to dupe seniors when they can all for the sake of making an extra buck. Some of the most common scams involve offering seniors poor financial products, omitting important information, twisting information, not being upfront about the costs, and not disclosing the risks of products.
The most common products used to commit these schemes are variable annuities and equity indexed annuities. Seniors are very attracted to annuities because of the promise of a fixed income after retirement. However, a lack of sufficient disclosure can cause more harm than good. Bad investments can be made and a lot of money lost.
To avoid this, it is a must to always ask questions. What are the costs? What are the risks? Exactly where is the money being invested? What is the rate of return? It can also help to shop around to compare costs and talk to other advisors to compare the information they disclose and the information they don’t. If there is any level of discomfort with an advisor, there is usually a reason for that.
3. Predatory Mortgage Lending by Banks
Most seniors will bank with the institutions that they know. Unfortunately, this does not mean that the financial institution will refrain from some kind of predatory practice when a senior takes out a mortgage.
One of the most common areas where seniors become victims of predatory lending is fees. It starts with the “discount points” that the lender charges for making the loan. Typically 3% or less of the amount of the loan is good. Anything higher than that is a sign of predatory lending. It can pay off to research fees other banks charge to get an idea of what is a good deal and what is not.
Two other signs include penalties for paying off early and inflated interest rates. Interest rates make money and some seniors are not aware of what they should be paying. Again, shopping around can prove what is a good deal and what is not. And it is good to ensure that the interest rates are not “adjustable” because they can skyrocket significantly in the future. The rate will never go down; it will only go up.
In fact, a predatory lender offering an adjustable rate may offer a low rate initially to then promise that they will “fix it” in the future through refinancing if the rate becomes unaffordable. If repeated refinances are encouraged, then the homeowner loses money in the way of fees and points. It is best to not be tempted by the little bit of cash that comes from the equity when refinancing.
All in all, these scams are just three of many that are costing senior citizens in excess of $3 billion per year. This comes out to be an average of $104,500 out of the pockets of every senior who is victimized. To keep these schemes from happening, it is best to always ask questions, trust that gut instinct that says something is wrong, and never take the word of one person or one institution. A lot of information can be obtained by doing some research and asking around. The end result will be fewer senior victims and more disgruntled predators.