retirement
Rules rev-up reverse mortgages

And that seems to be exactly who is using them, according to Bronwyn Belling, reverse mortgage specialist for the AARP Foundation. "Your typical borrower is a 73- or 74-year-old who has lived in the home a long time, seen a lot of appreciation but is having trouble making ends meet," says Belling.

However, reverse mortgages are not the automatic answer for everyone. "These loans work very well for some people and not so well for others," she says.

Because the fees are front loaded -- paid first out of the proceeds of the loan -- reverse mortgages "are better for someone who wants to stay in their home a long time," says Belling. That's because, unlike a traditional mortgage, most of the fees associated with a reverse mortgage are paid up front (subtracted from the overall balance that the home owner is borrowing).

Currently, with a federally backed loan, that includes a 2 percent fee for insurance on the loan, plus an equal amount for the lender's origination fee, plus regular closing costs which often run $2,000 to $3,000, says Belling.

For a 74-year-old borrower, that could total $14,000 to $15,000 on a $300,000 home loan, she says. Over the life of that loan, those costs can easily stretch to $30,000, she says. And that doesn't include interest.

It's not a good move for someone who wants to leave a home to their adult children. And, in some cases, the loans can also affect eligibility for Medicaid and Supplemental Security Income, or SSI. So if you rely on those benefits, you want to talk with a knowledgeable, neutral third party (not your lender), to make sure that the loan, or the way you've structured your payments, won't interfere with your income.

Some borrowers are also getting new reverse mortgages to get out from under their existing mortgage for retirement, says Belling. "Depending on where you live and what the house is worth, you may be able to borrow enough to pay off the debt," she says. But, if you're in financial trouble because your existing mortgage is a loan you really couldn't afford in the first place, you might be better off pursuing legal recourse against the original lender, says Belling. Always exhaust the legal remedies first, she says. "Some of those loans shouldn't have been made in the first place."

Many financial planners and consumer advocates view reverse mortgages as a tool of last resort.

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"Reverse mortgages are a wonderful tool to have at your disposal, but you should only play that card if you're out of other options," say Phil Cook, a Certified Financial Planner in Torrance, Calif.

Belling agrees. "We urge people to make sure they really need the loan now," she says. In some cases, she says, what a home owner really needs is help with home repairs, taxes or utility bills. And often, there are local programs that can provide that assistance, so that the retiree might not have to resort to a reverse mortgage.

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