CNBC Weighs In On 'Controversial' Reverse Mortgages and How They Really Work

NEW YORK (TheStreet) -- Reverse Mortgage ads are all over the place, with famous faces such as actor Tom Selleck telling you how your can keep you home and get some cash. But the reality of a reverse mortgage is more complex than that.

CNBC's personal finance correspondent Sharon Epperson joined Friday afternoon's "Power lunch" to discuss these "controversial products" and what kind of retiree should consider applying for a reverse mortgage.

In order to qualify for a reverse mortgage the applicant must be 62 or older, use the home in question as their primary residence and has to have paid off most of their original mortgage.

"Once approved you can take the money in a lump sum, a monthly payment, or as a line of credit and you don't have to make payments while living in the house," Epperson reported.

While all of this sounds like a great deal, Epperson pointed out that the homeowner is still on the hook for maintaining the home, paying taxes and unlike a traditional mortgage that declines over time, a reverse mortgage actually increases.

Once you get the money from the bank you live in the house without making payments, but interest accrues over time, raising the balance of the loan. When the homeowner decides to sell, or passes away the reverse mortgage must be paid back, including principle and interest.

"Now unless you have a pile of money to do that, you'll have to use the proceeds from selling your house and that means that your estate only gets what's left over, which could be very little," Epperson added.

A good candidate for a reverse mortgage is a retiree that has paid off their mortgage already, but still needs some income and someone that plans to stay in their home for the remainder of their life.

Before jumping into a reverse mortgage you need to talk to a federally approved housing councilor and think about getting a line or credit rather than a lump sum, so you can use the money as you need it, Epperson said.

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