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Study Shows Reverse Mortgage Risks

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Aug 18, 2009 5:45 pm US/Eastern

Study Shows Reverse Mortgage Risks

PITTSBURGH (KDKA) ― A new investigation by Consumer Reports discovered reverse mortgages can often lead to financial ruin.

Ads for reverse mortgages sound pretty enticing. Use the equity in your home to pay off debts or make a big purchase. You'll still be able to stay in your house and even have some money to leave to your heirs.

At 83 years old, Arlene Schwemmer is no longer able to live on her own and has had to move. She's worried that she'll get nothing from the sale of the home she shared with her late husband for 49 years.

Arlene's daughter says that's because a broker persuaded her parents to take out a reverse mortgage four years ago. The terms were complicated and hard to decipher.

"The decision on the reverse mortgage was one of the worst decisions I think my folks had ever made. It was tragic," Diane Zaugg said.

Reverse mortgages are loans aimed at people 62 or older.

Here's how they work: you cash in some of the equity in your home and receive a lump sum or a line of credit. You make no monthly payments and can use the money for any purpose. The loan comes due at the time of death or if you move out.

"The big danger with reverse mortgages is the hefty fees and mounting interest charges quickly erode any equity you have in the house," Andrea Rock said.

Fees and interest charges of more than $100 thousand pushed Arlene's loan to far more than she can get for her house.

As for the cash from the reverse mortgage, Arlene's daughter says the broker steered her parents to a poor investment and her mother has seen little of the money.

"There are brokers out there who prey on their customers' ignorance. And laws to protect against questionable sales tactics just aren't strong enough," Rock said.

Consumer Reports says for some people reverse mortgages can be an option, but only as a last resort.

"Always consider other options first because should you someday need to sell the house, these loans can be a disaster, wiping out all your equity and leaving you and your heirs with nothing," Rock said.

(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)

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