Rethinking Reverse Mortgages

Marketing Mayhem

Remember, interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan.

That is exactly why you should never consider this product for investment purposes, even though I know your wheels are spinning. But even a home-equity line is safer because you can lock into a rate with that loan, says Anderson.

"But in the last couple of years, [these loans] have gotten away from their original premise and are now being pushed on younger homeowners for liquid cash-type purposes," says Keith Gumbinger, vice president of HSH financial publications in Pompton Plains, N.J., which tracks a variety of loan products.

Think about it. If users don't fully understand what a reverse mortgage is, they would be a very easy sell. "Improve your lifestyle with increased cash flow!"

And plenty of people are buying into the rhetoric. Heck, even Fortune magazine recently suggested that readers should consider a reverse mortgage so that they could get some "dough while staying put." C'mon.

"But these products are being oversold -- and that's the word 'sold' -- because of the real estate market," says Patricia Houlihan, founder of Houlihan Financial Resource Group in Reston, Va.

"I'm leery because most people spend their lives trying to get to end with no debt in their house," says Houlihan, who says she would rather see a client in an immediate annuity if they needed a guaranteed income stream.

So beware. And if it happens that you believe a reverse mortgage is right for you or your elderly parent, then just make sure you understand all the conditions that could make the loan due and payable. Be sure your broker gives you the total annual loan cost, or TALC, rates, which shows the projected annual average cost of the reverse mortgage, including all itemized costs. This way you're not blindsided.