QUESTION: My parents are in their mid-70s and have some health issues. They would like to stay in their home. Would a reverse mortgage make sense for them?
— Keven Engel, Scottsdale, Ariz.
ANSWER: For cash-strapped seniors rich in home equity, a reverse mortgage can spell the difference between burgers at Denny’s and steak at a four-star restaurant — but that steak does come at a high cost. Reverse mortgages are the inverse of traditional mortgages. Here, you borrow against your home’s equity. But instead of making payments to the bank, the bank makes payments to you. Unlike a regular mortgage, your debt (rather than equity) grows over time. But as long as you continue to live in the home, you won’t owe a dime. The loan is paid back when the house is sold (often upon death) or your heirs can pick up the tab. Only folks age 62 and older are eligible.

MORE REVERSE MORTGAGE PITFALLS

Reverse-mortgage market zooms forward

Plenty of new products are emerging, but consumers still need to be wary

By Andrea Coombes, MarketWatch

The new breed of reverse mortgages generally allow for higher loan amounts and lower fees than the traditional, government-backed loans, but may charge higher interest rates.

There’s even a new product that sidesteps banks entirely and structures a reverse-mortgage loan between family members.

 hat growth may be spurred by a new generation of homeowners who are more willing to tap their home equity.

“There is an older generation that believes strongly in paying off the mortgage and having the home free and clear, but many boomers have used home-equity lines of credit their whole lives. They’re much more likely to see their home as a financial resource,” Rother said.

A willingness to tap your home equity isn’t always a good thing, he warned, particularly if you’re a younger retiree with many years of property taxes and maintenance costs ahead of you — costs which you’ll have to pay even with a reverse mortgage in hand.

But “the bigger risk, frankly, is just the cost of taking out a reverse mortgage,” Rother said. “This is a lot more expensive than a first mortgage, a second mortgage or a home-equity line of credit. The fees involved are much, much higher,” he said.

With the most common reverse mortgage, the FHA-backed home equity conversion mortgage, loan limits vary by locale, but top out at about $362,000. Borrowers can expect to pay about 4% of the loan amount in origination and insurance fees, plus another $900 to $1,200 in various other closing-cost fees, according to NRMLA.

Reverse-mortgage interest rates can be fixed or variable, although the Federal Trade Commission says most are variable. Those rates are tied to financial indexes such as the London Interbank Offered rate or 1-year Treasury rate and move up or down with market conditions.

“Our advice is that this could make sense for some people, but it’s risky and it’s expensive. It really should be a last resort if you really don’t have another option,” Rother said. “It’s more appropriate for people in their late 70s and 80s. They’re much more likely to find themselves in that situation.

MORE INFO ABOUT REVERSE MORTGAGES

Reverse mortgages are loans that are available to elderly homeowners. The loan amount is based on their age and the amount of equity they have in their home, and doesn’t have to be repaid until the homeowner passes away, moves out, or sells the house.

A reverse mortgage can be dispersed in several ways:

1. A line of credit can be extended, from which the homeowner can draw money as needed.
2. A fixed, monthly amount over a short period of time (5 years, for example).
3. A fixed, monthly amount for the rest their lives (or until they sell the home).
4. One lump sum.

The most popular type of reverse mortgage is FHA.s Home Equity Conversion Mortgage. This loan has the lowest interest rates, but also has the lowest maximum amounts you can borrow against the home’s equity. Maximum amounts vary by state and county, ranging from $200,160 to $362,170.

Fannie Mae also offers a reverse mortgage program called Home Keeper. The interest rates with Fannie Mae are a little higher, and adjust monthly. The benefit of the Fannie Mae program is that the maximum mortgage limit is higher. The limit for 2006 is $417,000 and does not vary by county or state.

To be eligible for a reverse mortgage, the borrower must be 62 or older, and the home must be the borrower’s permanent residence. Because there’s no repayment obligation, borrowers need not have excellent, or even good, credit.