Federally insured reverse mortgages are gaining in popularity, and experts think they're poised to become an even bigger part of the lending industry in coming years.

The reason: More seniors are finding that traditional retirement tools, including IRAs, pensions and 401(k)s, are not providing enough income to help fund their living and health-care expenses, said Peter Bell, president of National Reverse Mortgage Lenders Association.

More importantly, new reverse mortgage products in development could address one of the main concerns some seniors have about the loans -- their costs.

"There are at least four new products in development," said Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. Those applying for reverse mortgages a year from now could very well be pleasantly surprised by their lower costs. Increased demand for reverse mortgage products is inspiring competition among lenders; the market also has access to more statistics on the loan type, which is still relatively young.

"If you don't need to do it in the next year or so, definitely wait and see," he said.
The Federal Housing Administration insured 74,412 home equity conversion mortgages during the year ending Sept. 30, compared with 43,082 the previous year, according to the Department of Housing and Urban Development. Nearly half of all FHA reverse mortgages have been originated in the last two years.

A reverse mortgage is just what it sounds like -- instead of a homeowner making payments to the bank in order to pay off a mortgage, the bank pays the homeowner who has a significant amount of equity built up. The lender, in return, puts a lien on the property. The borrower never has to pay back more than the value of the home; the FHA pays the excess amount, if there is one.

Borrowers receive money from a reverse mortgage in four ways: They can get a lump-sum payment, a monthly cash payment, establish a line of credit or sign up for some combination of the three. To qualify for the loan type, borrowers must be at least 62 years old.

But not all seniors are falling in love with this financial tool.

It wasn't right for John Lopez, 71, a Boca Raton, Fla., retiree who looked into a reverse mortgage so that he and his wife could live in their condo more comfortably. The couple has a monthly income of $2,400, of which $700 goes to pay health insurance.
After learning some of the costs and the adjustable interest rates associated with reverse mortgages, they decided against it.

"The charges are horrendous," he said. "I don't think the average person out here could handle some of these things without a lawyer."

Costs a drawback

According to the AARP, the total upfront and ongoing costs for a 74-year-old borrower in a $250,000 home in May 2006 could be about $25,000 -- not including interest. For that, the homeowner could draw about $1,000 in monthly payments.
Almost all lenders charge adjustable interest rates on home equity conversion loans. Other costs include origination fees, third-party closing costs, mortgage insurance premiums and servicing fees.

But Bell points out that most often the cost of the appraisal is the only one that may need to be paid at the outset. Remaining costs often get paid with loan proceeds.
Another worry prospective borrowers have is that they will lose control of their property by signing up for the loan, said Jim Mahoney, chief executive officer for Financial Freedom Senior Funding Corp., a subsidiary of IndyMac Bank F.S.B. that specializes in reverse mortgages. But that fear -- that "the bank takes the house" at the end of the loan -- is unfounded, he said.

The homeowner retains the home's title for the life of the reverse mortgage, he said. When the homeowner moves or dies, the loan comes due and must be paid off by the borrower or the heirs, which could be done by selling the house and using the proceeds.
In order to ensure that borrowers know what they're getting into, they also must go through counseling before getting the loan.

The inevitable downside of reverse mortgages, however, is that as the equity in the home is diminished, less money is available for emergency purposes, said Jon Beyrer, a financial planner with Blankinship & Foster in Solana Beach, Calif.

As interest compounds upon interest during the life of the loan, it could very quickly be difficult to get out of a reverse mortgage should a homeowner change his or her mind about the decision midstream, he said. And as people live longer, many may find themselves needing assisted living facilities and having to leave their home.

"When we try to plan for the future, there are so many unknowns," he said. "The equity in the house is a nice cushion. That's the main reason why we like to look at it as a last resort."

On top of that, some consumers considering a reverse mortgage decide against it because they want to leave their house -- or the equity built up in it -- to their heirs.

Those considering a reverse mortgage should ask themselves five questions:

1.	Is downsizing a better option? As part of their due diligence, homeowners should seriously look at selling and moving as a way to tap home's equity, Scholen said. Those who do will sometimes realize they could get more for their home than they thought or that another living situation is more attractive. Or, they realize their best option is to stay in the current home.
2.	How long do you plan to stay in the house? A reverse mortgage doesn't make sense, for example, for someone planning on moving two years in the future, Mahoney said.
3.	What are your financial needs and how would a reverse mortgage help you? If the mortgage is being considered to supplement a rainy day fund, it might be best to consider a line of credit that can be tapped when it is needed, Mahoney said. If money is needed for a shorter period of time, maybe a home equity loan is a better choice, Scholen said.
4.	How much could you get from a reverse mortgage? Financial Freedom's Web site offers a calculator to help: Click Here for Calculator
5.	When do you need the loan? In addition to waiting for less expensive products in the pipeline, remember that homeowners are eligible for more money the older they are and the more their house is worth, Scholen said.