Kathy Henne: Look before you leap

Many retirees are facing financial insecurities from their battered investments, which explains why applications for “reverse mortgages” have risen nearly 50 percent in the last few years. It sounds like a great option: a lender essentially gives you a cash advance on your home’s equity, which doesn’t have to be paid back until you either move to another home or pass on to your heavenly reward.

There are drawbacks hidden in the details, however. Although recent legislation has raised maximum allowable home values, the formula for determining how much you’ll get includes other factors like your age and current interest rates. Your current mortgage balance and the loan’s fees are then subtracted from that number.

Although loan origination fees have been capped around $6,000, the monthly mortgage insurance premiums and service charges could push the total cost of the loan up to twice that much. If you think you might move anytime soon, this just doesn’t make sense.

While anyone 62 or older may qualify, it’s the youngest who run the biggest risk with a reverse mortgage, because you may very well outlive the life of your payments. When that happens, the equity you would have fallen back on has disappeared.

It’s best to seek other alternatives first, with your best option being to make your move now and downsize to a smaller home, pocketing the equity from your sale. You worked hard for that nest egg, so you should keep it!