America is facing retirement crisis. People are not saving enough for retirement while, at the same time, they are living longer.

Fifty percent of men between 55 and 66, and 47 percent of women, have nothing saved for retirement, according to the U.S. Census.

Nighttime TV and cable airwaves are filled with celebrities pitching reverse mortgages as a solution. But many financial planners dislike them and will only recommend then as a last resort to cash-strapped clients.

What is a reverse mortgage? 

With a reverse mortgage,  a homeowner borrows using their home as security. The amount depends on the equity in the home. The lender makes payments to the homeowner, monthly or in a lump sum. The borrower retains the title, but upon the death of the homeowner the loan must be repaid. That often results in the sale of the home to repay the lender.

Theodore Daniels, financial planner and founder and president of the Society for Financial Education and Professional Development (SFEPD) in Alexandria, Virginia, a financial literacy non-profit, says reverse mortgages can provide cash-strapped homeowners with income to cover living expenses or to pay taxes on their homes.

The downside, he says, is you lose the equity in your home. “If you were to experience an emergency or a major expense associated with a house, you wouldn’t have any source to pull money from,” he says.

Nicholas Abrams, financial planner and president and CEO of Opulentia in Hunt Valley, Maryland, says he has mixed feelings about reverse mortgages. They may be a solution for a senior who is cash strapped, isn’t concerned about leaving the home to heirs and wants to stay in the home. But he would only recommend them as a last resort. “I just think people need to really think it clearly before they make that decision,” he says.

Is a reverse mortgage right for you?

Before you commit, you should understand:

1. Understanding fees and interest

When a homeowner takes out a reverse mortgage, they must pay interest and fees. According to the Consumer Financial Protection Bureau, the borrower must pay interest and fees each month on top of the interest and fees paid the previous month.

“The larger your loan balance and the longer you keep your loan, the more you will be charged in ongoing costs,” the CFPB says. Upfront costs include loan origination fees, closing costs and annual mortgage insurance premiums. And like traditional mortgages, reverse mortgages offer the option of either fixed or variable rates.

“If you take $100,000 balance on a reverse mortgage, it eventually could grow to $150,000 or more because they add back in the interest charged against the loan,” says Daniels.

2. Losing equity in your home

The homeowner keeps the deed, but upon his or her death, the loan must be repaid. Generally, it means selling the home to repay the loan.

Daniels says you no longer have the equity in your home. “If you were to experience an emergency or a major expense associated with a house, you wouldn’t have any source to pull money from,” he says. You do lose that element of your financial plan. That’s the big thing.

“Some people have unexpected medical expenses, you know, where the insurance isn’t enough to cover the expenses, or they need the equity in the house to cover their long-term care if they don’t have a long-term care insurance policy,” he says. “You give up all that when you acquire a reverse mortgage.”

3. Selling the home to repay the loan

The homeowner keeps the deed, but upon his or her death, the loan must be repaid. Generally, it means selling the home to repay the loan.

Abrams says if you would like to pass the home to your heirs upon your death, you should be cautious. “I have seen clients in their 80s who took the reverse mortgage 10-plus years ago and are seeing that balance on that loan increasing every year. At that point there is really nothing you can do. Unfortunately, when they pass away, that the house is going to have to be sold very soon in order to pay that off.”

4. Reviewing alternatives

“Look at what other assets might be available to utilize,” says Abrams. “Next, look at how much equity is in the home. A traditional cash out refinance might be an option. And then, really having a conversation. Is it better to stay in the house or is it better sell the house and invest some of the proceeds and then take some of them and move somewhere else.”

“It really just depends on the situation,” he says. “For some older people it might be more advantageous. If the house is not in the best condition, they’re not going to put the money to fix it up and nobody else is going to help them – go ahead and sell the house. Then they can look at getting something smaller that they can maintain. And then using some of those funds to invest to help them live off.”

More Info

For more info and tips on reverse mortgages and alternatives, and resources and rights when considering one, visit the FTC’s website on reverse mortgages, available here.

Your Turn

Did you use a reverse mortgage?  Does it sound like a good deal to you? Let us know in the comments!

Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.

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