Rethinking Reverse Mortgages

The biggest is how much you can actually get out of your house. People assume that just because the fair market value of the house is, say, $2 million, someone is going to hand them a $2 million check to draw on and pay for that trip around the world.

Not so.

Because the amount offered is generally based on the median home in your area.

The average max on a HECM is somewhere around $312,000, which is based on the median home value in most areas, says Anderson. With a private loan, the most you'll get is anywhere from 30% to 35% of the value of your house.

Anderson offers an example based on his recent research in this area. Let's take a 75-year-old who owns a home, currently valued at $3 million, in downtown Seattle.

With the HECM, our elderly person would get approximately $185,000. That's it because that's the median home value in the area. With a Financial Freedom product, he'd end up with around $924,000. Much better but the fees and interest will also be correspondingly higher. And neither loan is coming close to $3 million.

So you're not getting nearly as much money as you originally expected -- and the fees you pay on that money can be outrageous.

Most products require you to pay origination fees or points, annual servicing fees and other closing costs.

The interest rates can be steep, too. The HECM loan is the current T-bill rate plus margin. Financial Freedom's rate is based on LIBOR plus margin.

Even worse, it's difficult to lock into a rate with any of these products. Most have variable rates that cap anywhere from 12% to 15%. Big deal.