The complexities of reverse mortgages can set homeowners back


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SALT LAKE CITY — It's a big spoiler of retirement dreams — having enough cash for everyday living expenses that just never end. To keep up, many Americans are turning their homes into income through reverse mortgages.

From former presidential candidates like Fred Dalton Thompson to "The Fonz" — Henry Winkler — late-night television is full of pitches for reverse mortgages. And their hook is strong. Instead of paying a lender for you to live in your house, they pay you.

"Reverse mortgages can do some good in getting you money and getting you the income," said certified financial planner Shane Stewart.

A reverse mortgage is a loan that converts your home's equity into cash payments from the lender — usually once a month. In most cases, you don't pay the lender back so long as you stay in your home.

But it's not free money.

When you sell your home, move out or die, you, your spouse or your adult kids must pay off the loan plus interest. They can either take over the loan, sell your home or hand the keys over to the lender.

"In a lot of cases, they [lenders] will own the home and they'll liquidate that, and they want the very least out of it what they loaned," said Stewart. "But in some cases, some clauses are in there where they'll keep the entire home. So, you need to be very careful about the terms you agree to when you take out a reverse mortgage."

Stewart says one big downside to a reverse mortgage is its cost. Typically, the interest rates and loan fees are considerably more expensive than a traditional loan.

"It's not astronomical," said Stewart, "it's not as if you're taking out a loan on the title of your car. But, you're going to pay more than in any other venue."

Another downside, Stewart said, is the complexity of a reverse mortgage.


In a lot of cases, they [lenders] will own the home and they'll liquidate that, and they want the very least out of it what they loaned. But in some cases, some clauses are in there where they'll keep the entire home. So, you need to be very careful about the terms you agree to when you take out a reverse mortgage.

–Shane Stewart, financial planner


"They come with a lot of strings attached. You need to know how to navigate that," Stewart said. "There are a lot of financial landmines."

There are so many attached strings that the government requires homeowners seeking reverse mortgages to see government-approved housing counselors like Alyssa Fereday of Utah AAA Fair Credit Foundation.

"They really need to review their situation," said Fereday, "and see what is best for them."

Fereday said about one out of three homeowners she counsels ultimately pass on a reverse mortgage.

"Some people worry about going into debt," said Fereday. "They also worry about the equity in their home, their heirs. They worry about leaving enough for them."

Fereday points out that despite the claims of some reverse mortgage ads, it is possible to lose your home if you've taken out a reverse mortgage.

"You're required to pay your property tax, homeowner's insurance and keep up the maintenance on your home," said Fereday. For those reasons, and if you're away from your home longer than six months, the lender can foreclose on your home.

"As financial planners," said Stewart, "we always recommend a reverse mortgage be your last option. If you've exhausted all possible options and there's really no other way for you to get a monthly income."

Stewart said a home equity line of credit may be one of those options.

"You can keep your home and just take the equity in the form of a loan that's separate from leaving the home to the bank," said Stewart. "You do have to pay that eventually, but that could be paid off in other assets."

Fereday suggests homeowners look into downsizing to a smaller home or look into refinancing.

Both say people should plan for a long retirement life. If you tap into your home's equity too early with a reverse mortgage, you run the risk of outliving the loan funds.

"A lot of folks are finding themselves in a bind," said Stewart. "We're living longer, we're retiring earlier and that's a dangerous combination."

Contributing: Debbie Dujanovic

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