Reverse mortgages are expensive. Try a family loan instead.

Reverse mortgages are too complicated and costly, says a recent report from consumer advocates. One alternative: a private reverse mortgage.

Steve Ruark/AP/File
In this Nov. 1 photograph, Robin Miles stands outside her Baltimore home. About a year ago, Miles got a reverse mortgage on the three-bedroom Spanish-style house. some consumer groups, however, argue that reverse mortgages are too complicated and costly.

With many seniors' finances squeezed by the stock market's plunge over the last three years, reverse mortgages look like an alluring idea.

You stay in your home while selling it off a little at a time, using the payments to fund your retirement. Since home equity makes up roughly one-sixth of the average retiree's wealth, it's no wonder interest is running high. Without tapping their home equity, 3 in 5 seniors are at risk of running out of money, according to a March report (.pdf) from the Center for Retirement Research at Boston College in Massachusetts.

But are banks' reverse mortgages the best way to go? Some consumer groups don't think so.

"They should be considered only as a last resort," says a report released last week by Consumers Union (publisher of Consumer Reports), California Advocates for Nursing Home Reform, and the Council on Aging Silicon Valley. The groups list alternatives that seniors should consider first, including applying for Supplemental Security Income, Medicaid, energy and telephone discount programs, city and county grants, state tax-postponement programs, and Veterans pensions. (You can see a full list of alternatives here.)

One intriguing option is an inter-family loan. It works like a reverse mortgage, but instead of interest and fees going to a bank, the money stays within the family.

Here's how it works: Family members regularly forward funds to the senior, who uses his or her home as collateral. The payments, along with the interest received by the lenders, is tracked and recorded. When it's time to sell the house, the investors recoup their contributions and the interest.

"The costs associated with family investors are typically a fraction of what they would be from an institutional lender," says the consumer advocates' report. "As a practical matter, it is in the ultimate financial interest of the senior and the would-be heirs to preserve the inheritance rather than having the senior’s home being sold in order to pay back an expensive reverse mortgage loan."

Of course, the family has to agree to this course of action and have members who are able to swing the payments financially. Consumers Union suggests families consult an estate planning attorney or a Certified Public Accountant (CPA) and have them draw up the paperwork.

"Even after the bursting of the real estate bubble, housing remains a key piece of the retirement security puzzle," concluded the Center for Retirement Research in its March report. "Financial services firms need to acknowledge that existing reverse mortgages are often complicated and expensive and that the industry needs to develop innovative approaches to ensure that retirees have easy and efficient access to their equity."

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