Here's What Suze Orman Has to Say About Reverse Mortgages

Like any loan, it's best to approach a reverse mortgage with caution. Knowledge is key.

Suze Orman is nothing if not passionate about her followers, and a series of calls and emails from fans seeking advice has gotten the financial guru worked up. The calls deal with reverse mortgages and whether they are a good idea.

What is a reverse mortgage?

A reverse mortgage is much like a home equity loan in that seniors can tap into the existing equity in their homes. The major difference is that a reverse mortgage is repaid with interest, only when the homeowner dies or sells the property.

What are the rules of a reverse mortgage?

Reverse mortgages are designed to help seniors find the money they need to age in their own homes. Here are the rules associated with a reverse mortgage loan:

• A homeowner must be 62 years of age or older.
• They must own the home outright or have a substantial amount of equity in it.
• The property must serve as the senior's primary residence.
• They must receive counseling from a HUD-approved reverse mortgage counseling agency. During this meeting, the counselor and homeowner will discuss eligibility, financial implications, and alternatives to a reverse mortgage.

It's risky, says Orman

If landing a traditional mortgage once felt like a breeze, the same may not be true of a reverse mortgage. Like all loan types, there are risks associated with reverse mortgages.

Taking a loan too early

The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.

Once they sell, a homeowner must repay the reverse mortgage with interest. If they're in financial distress, it will only be made worse by having a loan hanging over their head.

Not understanding how the loan works

Orman spoke of a 71-year-old listener named Carol. Carol has severe COPD and an income of only $1,500 to $1,600 per month. At the time of her husband's death, Carol had $53,000 remaining on her mortgage. When someone called her to convince her to take out a reverse mortgage, they made it seem like her financial situation would improve.

Any money owed on the original balance is deducted from the amount the homeowner can borrow, and the original mortgage is paid off. "All of a sudden, she owes $90,000 on this reverse mortgage. The house is only worth $148,000, so she's only going to get like $60,000, and she can't do anything with that now. If she simply had sold the house, to begin with, we could have figured it out from there because owning a home is expensive," Orman said.

Homeowner expenses continue -- even after a reverse mortgage

Homeownership can be expensive, even after taking out a reverse mortgage. According to the Consumer Financial Protection Bureau (CFPB), even after being approved for a reverse mortgage, a homeowner remains responsible for paying ongoing property charges. These expenses include taxes, insurance, maintenance, and repair costs.

While the idea of a reverse mortgage may seem sound, it's important to approach such loans with an abundance of caution.