A retired couple in Madison reached out for advice after hearing about reverse mortgage scams in the news. They were concerned about reports of poor counseling and excessive fees targeting the elderly, wondering if they should avoid this product altogether. Let's explore the couple's concerns and clarify how reverse mortgages actually work.

First, we examined the structure of the product. A reverse mortgage allows homeowners aged 62 and older to borrow against their primary residence, receiving funds as a lump sum, monthly payments, or a line of credit, unlike traditional loans that require monthly repayments. The loan is repaid when the home is sold, the owner passes away, or no longer resides in the home. The most common type is the HECM, which is the only reverse mortgage type insured by the federal government. It's important to note that concerns about scams often arise more from unverified counseling or exaggerated advertising rather than the product itself.

Next, we checked the value of the couple's home. According to Zillow data as of May 31, 2026, the average home value in Madison is $435,128, which has increased by 2.1% over the past year. If they have lived in their home for a long time, they may have significant equity, but the actual loan amount will depend on their age, interest rates, and remaining mortgage balance.

Third, we looked at property taxes. The average effective property tax rate in Wisconsin is around 1.51%, which is noticeably higher than the national average. While specific checks are needed for Dane County, it's important to emphasize that even after obtaining a reverse mortgage, the homeowner is still responsible for property taxes and insurance. Failing to pay these can lead to a risk of default.

As of 2024, the percentage of the population aged 65 and older in Wisconsin is 19.6%, slightly above the national average. As the retirement population grows, so does interest in reverse mortgages, along with increased vigilance against potential scams targeting this demographic.

Now, let's summarize the pros and cons. The advantage is that it provides cash flow for living expenses or medical costs without monthly repayment obligations. HECMs are non-recourse loans, meaning that if the home value falls below the loan balance, heirs are not required to pay the difference.

On the downside, costs are a clear disadvantage. With origination fees, an initial mortgage insurance premium of about 2%, an annual maintenance insurance fee of around 0.5%, and closing costs, the initial burden is greater than that of a traditional mortgage. Over time, the equity may decrease, potentially reducing the assets passed on to children, which we explained to the couple.

They also need to consider how to manage the funds after receiving them. While reverse mortgage funds do not affect Social Security or Medicare benefits, if they are receiving benefits based on income and assets, such as Medicaid or SSI, the way they hold the funds could impact their eligibility, which we also discussed with the couple.

We addressed the spouse protection rules for cases where only one spouse is listed as the borrower. HUD regulations allow the non-borrowing spouse to continue living in the home even if the borrowing spouse passes away, provided certain conditions are met. Knowing about these protective measures can significantly reduce vague anxieties.

Finally, we reviewed the safety measures in the application process. HECMs require passing a financial assessment before applying and mandatory counseling with a HUD-approved counseling agency. This process serves as a minimal safeguard against scams. Instead of feeling vague fear due to news reports, it seems safer to go through the official counseling process and discuss thoroughly with family before making a decision. This article is not investment or legal advice, and it is advisable to consult with a professional before applying.