I'm not saying all reverse mortgages are bad. The idea has merit: allow cash-strapped seniors to stay in their homes by borrowing against their house's appreciated value. The loan isn't due until the homeowner dies or moves. That's the abbreviated description, without important asterisks.

The advantages are enticing: you never lose your home as long as you abide by the agreement, you never owe more than the value of your house, you never have to repay during the life of the loan, and the loan isn't considered income (so it's not taxable). You can use the cash to repair or remodel you home, pay off other debts, or even travel.

The arrangement can work well for seniors in a certain situation: elderly homeowners without better options, who have considerable equity in their well-maintained houses (not mobile homes). But what happens when it's one-off from this specific description? Let's examine each element to see what can go wrong.

Elderly. According to a MetLife study, the percentage of loans granted to young seniors (aged 62-64) has increased 15% since 1999. Moreover, 70% took a lump sum rather than an annual payment. When this happens in something other than a terminally ill mortgagee, this "solution" merely puts the homeowner in a worse position later in life, when he or she may be even less able to recover from a financial setback.

Homeowner. If the mortgage is taken in only one name, the death of that mortgagee calls the loan and can force a surviving spouse to move. A 1980s federal statute regarding the insurance of home equity conversion mortgages is supposed to protect against this possibility, but it backfires when borrowers are encouraged to leave a younger spouse's name off the deed to qualify for a larger loan. AARP receives several calls a week about this problem, according to Craig Briskin, a partner and head of the mortgage fraud group at Mehri & Skalet, PLLC. The DC-based law firm specializes in consumer protection and is working on a case suing HUD for failing to meet its regulatory responsibilities.

Without better options. Reverse mortgages are like home equity lines of credit with repayment deferred, but much more expensive and complicated. There is a loan origination fee, closing costs, and interest charges that accrue against an ever-growing balance. The Consumer Financial Protection Bureau warns that after ten years, the fees and interest on a $166,434 reverse mortgage could amount to $56,300.

Considerable equity. The less equity a homeowner has to draw upon, the higher will be the costs and fees as a percentage of the loan.

Well-maintained home. As a condition of the mortgage, the lender requires that the homeowner keep current on property taxes, insurance, homeowner fees, and home maintenance. This is understandable -- they are depending on being able to sell a valuable asset at the other end of the loan. But if the homeowner doesn't have enough income to keep making these payments, he could lose the house. Nearly 10% of RM borrowers are at risk of foreclosure, according to a study by the Consumer Financial Protection Bureau.

There are some safeguards designed to weed out people for whom the loan is not appropriate. Most lenders require prospective borrowers to see an HUD-approved reverse mortgage counselor before they will consider an application. (You can find one at 800-540-2227).

As a financial advisor, I offer the simplest advice first: reduce your budget so that your outflow is less than your income. If the Great Recession wreaked havoc on your nest egg, you need to recalculate how much you can draw each year to increase the chances your savings will see you through. (A fee-only financial advisor can help with this.)

If reducing your budget is impossible (rather than just uncomfortable), there are other potential solutions that may not gobble your equity as much. One is a plain vanilla home equity loan or even a traditional mortgage. Second is selling your house and moving somewhere less expensive, including senior housing. The housing market is now recovering in most areas, which makes this a better option than it was just a year ago. You may want to purchase an annuity with the difference, but these can also be expensive.

Last, sell the house and move in with the kids. If you (or they!) aren't thrilled with this idea, think of the worse alternative – having to move in with your kids after losing the entire equity in your home.

Karen Telleen-Lawton, CFP®, is the principal of Decisive Path Fee-Only Financial Advisory
( www.DecisivePath.com) as well as an environmental and economics author and writer
(www.CanyonVoices.com). She can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it.

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