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Reverse mortgages can be risky

By Jennie L. Phipps · Bankrate.com
Monday, July 2, 2012
Posted: 5 pm ET

You might have noticed as you get closer to retirement and deeper into retirement planning that there is an increasing amount of marketing of reverse mortgages.

Reverse mortgages allow you to pull the equity out of your home and use it to pay for almost anything, but these are complicated transactions, and they have a long list of drawbacks.

Consumers Union, the policy and advocacy division of Consumer Reports, is urging the federal Consumer Financial Protection Bureau to strengthen regulations on reverse mortgages.

"A reverse mortgage can be the right choice for some borrowers, but they aren't the right choice for everyone," said Norma Garcia, senior attorney with Consumer Union.

"Before you choose a reverse mortgage, you should consider all the other options.  If you have an ongoing need for cash and you don't have any other options to make those ends meet but you do have equity in your home, then it might be an option," Garcia says.

But before you make that decision, Garcia recommends that you first get financial counseling. Select a counselor who isn't connected to a lender. Choose someone who will help you understand the pluses and minuses of reverse mortgages and walk you through the costs, which can be considerable. The best choice, Garcia says, is a Department of Housing and Urban Development-approved counselor who specializes in reverse mortgages. You can find an HUD counselor in your area by going to HUD.gov.

If you decide to go the reverse mortgage route -- even if you got reverse mortgage counseling -- Garcia thinks that before you sign on the dotted line, you also should talk to an elder law attorney and a certified financial planner or a Certified Public Accountant. These are experts who can help you understand the ins and outs of reverse mortgages and their financial and legal consequences.

Yes, hiring these professionals can be costly, but as Garcia says, it's money well spent. "They'll help you make sure that you aren't making a bad decision whose consequences you'll have to live with for the rest of your life."

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