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Reverse mortgages can mean reversal of fortune for heirs

Alex Trebek is one of the many celebrities to appear in television ads for mortgage lenders. Trebek is not talking about just any mortgage, and he is not talking to just any homeowner. He is talking about a reverse mortgage, and his audience is any person age 62 or older who is feeling a little cash poor.

In these commercials, Trebek and Pat Boone and even former Senator Fred Thompson explain how easy the process is, each with a unique but studied air of "I wish I'd thought of this." The sales pitches are effective. It is all too easy to understand how appealing the product would be to a 70-year-old homeowner on a fixed income that is not enough to pay for air conditioning in Houston's sweltering summer heat. 

Reverse mortgages look like free money. A homeowner must be 62 or older and must have a certain amount of equity in his or her home. The lender "gives" the homeowner a percentage of that equity (based on a predetermined formula). The payout can be in a lump-sum, in several installments or even monthly. The money can be used for anything -- bills, travel, gifts for the grandkids, whatever the homeowner's heart desires.

The homeowner has just one obligation: He must pay back the loan if he moves. That's it. A reverse mortgage is like a home equity loan that you never have to pay back.

If only that were true. The loan also comes due when the homeowner dies, and that means that the homeowner's heirs are left with the debt.

And that, of course, can mean big trouble for the heirs.

We'll continue this in our next post.

Source: The New York Times, "Pitfalls of Reverse Mortgages May Pass to Borrower's Heirs," Jessica Silver-Greenberg, March 26, 2014

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