Reverse mortgages, which have been trumpeted as the panacea for many seniors who have paid off their home loans, are not a good fit for most older Americans, according to a new Consumers Union report.

Reverse mortgages should be “a loan of last resort for a senior who needs cash,” according to the report from the consumer watchdog group.

“The right reverse mortgage may be appropriate for some low-income relatively healthy seniors who lack other retirement assets, do not qualify for lower-cost alternatives and cannot meet their current mortgage obligation,” the report states.

Reverse mortgages might also be “reasonable” for seniors who are in foreclosure and have no other means to pay the outstanding amount, don’t want to sell the house or downsize or do not want to move into assisted living facilities in the future, the report indicates.

Accepted financial instrument

Reverse mortgages are available to homeowners at least 62 years of age whose homes are paid off or nearly paid off. The mortgage enables the homeowner to obtain income through cash payments or credit lines based on the home’s equity.

“Reverse mortgages are now a permanent part of the nation’s financial landscape and the growth potential for this largely untapped market is astounding,” says the report from the Consumers Union. By 2050, more than 50 million Americans will be 62 or older and more than 80% own their homes. Those homeowners control about $4 trillion in equity.

The Consumers Union report follows a U.S. Government Accounting Office report in 2009 that suggested that cross-selling of reverse mortgages to fund insurance or other purchases often put seniors in potentially unsuitable financial situations.

Not all uses are appropriate

The Consumers Union report suggests that reverse mortgages should not fund deferred annuities or to pay nursing home expenses because the borrower must remain in the home or the loan will come due. “A reverse mortgage is also not a good choice if the borrower will move out of the home in three years or less, because of the high up-front costs of the loan,” the report states.

A reverse mortgage can become unnecessary or put Medicaid eligibility in jeopardy if the borrower has less than about $109,560 in assets while a spouse resides in a nursing home, according to the report. Medicaid might cover the costs of the spouse in the nursing home.

The  Consumers Union suggests that some seniors fail to properly understand reverse mortgages.

“Some seniors erroneously believe that the federal insurance makes reverse mortgages ‘government loans,’” even though those loans do not protect the homeowner from foreclosure if he or she defaults for failing to maintain the property, pay taxes or pay homeowners insurance, according to the Consumers Union.