In recent years there has been no shortage of articles about the Home Equity Conversion Mortgage (HECM), better known as the reverse mortgage. At AgingOptions we read these articles with a great deal of interest, since questions about these powerful but misunderstood financial tools come up frequently in our LifePlanning Seminars and on our radio program. We’ve noticed an unmistakable shift in opinion among financial experts: at one time most articles about HECMs advised extreme caution and most writers expressed outright skepticism concerning the value of reverse mortgages, but that skepticism has largely evaporated. Today a growing number of financial writers consider the reverse mortgage to be a viable if not essential part of retirement planning for a significant number of seniors.

Still, even reverse mortgage professionals acknowledge that these tools aren’t for everybody. That’s why we were drawn to this article that we just discovered on the USNews website. We like the article because it appears to present a balanced view of the HECM question that we found helpful, and we think you will, too. The article has a straightforward title: it’s called, “8 Factors Retirees Should Consider Before Getting a Reverse Mortgage.” As the writer says, “A reverse mortgage can be a tool to provide cash in retirement, but it’s important to proceed with caution.” There’s nothing magic about these eight points, but they do appear to represent a good starting place as you consider your options.

By now the basics of a reverse mortgage are generally well-known: qualifying homeowners 62 years old and older may be able to borrow against the equity in their home without having to sell or make payments until the homeowners move or pass away. As the USNews article states, “For those who have paid off their home or only have a small mortgage, a reverse mortgage may be a way to help cover retirement expenses.” By accessing equity, “you can supplement your income and remain in your current home.”  Clearly, though, this kind of financial decision should never be entered into lightly. Let’s take a look at the eight recommendations made in the USNews article to see which ones resonate the most with you. Before getting a reverse mortgage, you need to:

• Understand what an HECM entails. This is a basic place to start, because as we said above, reverse mortgages are widely misunderstood. Don’t rely on your Cousin Max or your Facebook friends to get the facts, and don’t make an uninformed decision! Talk to an expert and make certain to get all your questions answered. (We have some recommendations along this line which we’ll share in a moment.)
• Look at the different payout options. One of the great “selling points” for a reverse mortgage is its flexibility: homeowners can opt for a lump sum payment, a monthly payment, or – the mode we recommend for most people – a line of credit which grows over time. This versatility is a big part of the appeal in adding an HECM to your financial portfolio as part of your retirement strategy.
• Investigate your equity. The USNews article says, “A reverse mortgage is only a viable option if you have a substantial amount of equity in your home. If you’re still carrying a small mortgage in retirement, you’ll want to talk to a financial advisor to help you evaluate your options.” While this may be true, we suggest to do your homework before you “disqualify” yourself, and find out the facts about your situation from a reverse mortgage professional. One great benefit of an HECM is elimination of the monthly mortgage payment, a huge boon to the average retiree.
• Understand the fees. Explains USNews, “With a reverse mortgage, you can expect initial expenses such as closing costs, a loan origination fee and an appraisal fee. You’ll be required to set up a session with a third-party counselor to make sure you understand the loan. In addition, the lender may charge loan servicing fees, and you’ll have to pay mortgage insurance premiums.” The article estimates costs at 3 to 4 percent of home value, financed into the loan and not paid out-of-pocket. But your terms may vary.
• Consider the long-term impact. If you sell your home, expect your reverse mortgage to come due. For that reason, many advisers recommend an HECM for people who plan to stay in their home for five or more years.
• Talk to your family members. If it is your dream to bequeath your home to your heirs as a free and clear gift, an HECM will complicate that picture considerably. For that reason it’s sound advice, recommended in the USNews article, to talk with family members beforehand and make certain they understand your plan to use a reverse mortgage in retirement. Your heirs can still inherit the home when you pass away but any reverse mortgage balance will have to be satisfied, usually within one year of your death.
• Understand how you plan to use the funds. Opinions vary about how and when to use HECM proceeds. At AgingOptions our advice tends to be to use the money to help make sure your home will allow you to age in place and to help with your future care expenses. Your line of credit is also an excellent guarantee that you’ll have funds on hand for emergencies. But if you’re thinking of a reverse mortgage as a source of “fun money” for big vacations and a nice new car, we urge you to think twice. This is your home equity you’re spending. Be careful! Don’t squander funds you can never regain.
• Make certain the HECM is your best choice. As we said, a reverse mortgage is not right for everyone. Maybe staying in your present home isn’t your best option: perhaps it’s time for you to consider selling your home and downsizing, or using your present equity to allow you to cover entry fees in a retirement residence. This is where objective, professional advice is truly essential. At AgingOptions we often refer questions about reverse mortgages to trusted pros like our friends at Kiel Mortgage, because they not only know the HECM market intimately but will also give you advice that is insightful and helpful, serving your interests and not their own. Contact us and we will put you in touch with Kiel Mortgage. Then you can decide with absolutely clarity and confidence whether an HECM is right for you.

For assistance with all aspects of retirement planning, the professional team at AgingOptions stands ready to serve as your guide. To take the next step in learning all about our comprehensive strategy called LifePlanning, please accept our invitation to join Rajiv Nagaich at one of our upcoming LifePlanning Seminars, offered free at locations throughout the region. You’ll find a complete list of dates and locations by clicking here – then you have the choice of online registration or contacting us by phone. We’ll look forward to meeting you soon at an AgingOptions LifePlanning Seminar near you.

(originally reported at https://money.usnews.com)