Should You Use a Reverse Mortgage in Retirement?

These often expensive loans are not right for everyone.

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Seniors strapped for cash might want to consider a reverse mortgage in retirement. These loans have become a popular tool for retirees who found their retirement savings hammered by the down market. Over 100,000 people took out a reverse mortgage in the U.S. last year. But a reverse mortgage isn’t necessarily a good idea for everyone. Here is how to tell if these loans are right for you.

[See 7 Costs to Eliminate Before You Retire.]

Reverse mortgage basics. Reverse mortgages are not actually a mortgage, but a loan. These loans are available to homeowners who are at least 62 years old and who have significant equity in their homes. The loan basically taps your home’s equity, and the lender gives you the money either as a monthly payment, lump sum, or line of credit.

You will still be responsible for maintenance on the home, insurance, and property taxes. If you don't pay those things, the lender can foreclose on your property. Since interest is always accruing over the full term of the loan and home values can fluctuate, the reverse mortgage debt can end up exceeding your home's value. Plus, if you move out or sell the house, the loan becomes due.

Going into debt. You are taking on debt when you do this deal. One of the worst things you can do in retirement is go from a debt-free situation to being in debt. This is not the time in your life to take on a loan if you don’t have to.

[See 5 Ways to Simplify Your Financial Life in Retirement.]

Stay in your home. This financial move isn't for a home owner considering a move anytime soon. To justify the costs associated with this loan, you would need to stay in the house several years. If you take the lump sum, you could end up having to stay in the home until you die.

Costs. The fees on reverse mortgages can be expensive. You usually have to pay an origination fee, closing costs, mortgage insurance premiums, a mortgage insurance servicing fee, and fees for mandatory credit counseling. Recent legislation has put a stop to the over-the-top fees, but there are still many expenses associated with these loans.

Alternatives to reverse mortgages. There are times when a reverse mortgage does make sense for some people. But a reverse mortgage should really be a last resort. Here are a few suggestions for managing cash flow problems without using this financial product.

Change your lifestyle. If your problem is spending, then ask yourself if there are things you can cut out of your monthly budget. Can you live within your means until your retirement asset returns catch up to your needs?

Sell a few things. Consider other assets in your life besides your home that you could sell for cash to assist you.

[See 5 Tips for Affordable Travel in Retirement.]

Part-time employment. You could take a part-time job to bring in the extra income needed to support your lifestyle.

Sell your home. Consider selling your home and downsizing to a smaller, more affordable place. You could also rent and live off the proceeds of the sale of your former home.

Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.