Reverse mortgages remain a popular lure for cash-strapped seniors, but what's good in theory is often abysmal in execution.

A reverse mortgage allows someone who is "house rich and cash poor" to get a payment from their lender in exchange for the bank getting the equity in the house over time. It allows people stay in their homes and have their bank pay them to stay in their home.

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Here are the pros and cons of reverse mortgages

Unfortunately, what might sound like a good idea can be fraught with a lot of danger. When doing a reverse mortgage, you can either take a check every month from your bank or take a lump-sum cash out. The real danger comes with the latter. Taking a lump sum cash-out option puts you right in the crosshairs of sleazy insurance salespeople who will push a series of annuities on unsuspecting seniors. This is just an absolute, horrific abuse of trust and of that senior citizen.

Here's the thing. If you have an elder, you need to get a little nosy. While you're busy with your life, somebody could come along and eviscerate their finances if you're not careful. Consumer Reports  puts it bluntly: "Reverse mortgage should only be a last resort for seniors who want to stay in their homes and have no other alternatives."

I agree wholeheartedly. A reverse mortgage should be the last option, not the first, when all else has been exhausted. If you're talking about a family with younger members of means, it is generally better to have them financially help out an aging relative or relatives than to have a broker or salesperson take advantage of the senior with a reverse mortgage.

Note: ClarkHoward.com is no longer recommending Reverse.org.

Deceptive info in the mail

Beware that some scamsters are sending deceptive info about reverse mortgages to seniors. Consumerist.com reports that some of these pitches have been marked on the envelope with words like "Economic Stimulus Notice," "Government Lending Division" and "Federal Housing Administration Home Benefit HECM Program." Some of these come-ons even falsely claimed that your heirs will still be able to inherit your house, which is untrue. Be careful out there!

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A reverse mortgage that gets it right?

There is an equivalent of a reverse mortgage called a caregive mortgage. National Family Mortgage, a company out of New England, has streamlined the process of setting one up. A caregiver mortgage (aka intra-family loan) is basically comparable to a private reverse mortgage with much more favorable terms, according to The New York Times.

For $2,500, National Family Mortgage does all the legal work, including recording the promissory note, the joint lender agreement and the mortgage. No appraisal or inspection required. Interest rates are set at arm's length, and the Times reports most are under 3%.

So you if you are OK financially as an adult child or if a few siblings can scratch this money up, it might be worth a look. You'll save your parents so much money in the long run vs. going the traditional reverse mortgage route!

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Image of Clark Howard About the author: Clark Howard

Clark Howard is a consumer expert whose goal is to help you keep more of the money you make. His national radio show and website show you ways to put more money in your pocket, with advice you can trust. View More Articles

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