Is a reverse mortgage right for you?

(Money Magazine) -- On the face of it, a reverse mortgage sounds like a no-lose deal for older homeowners. A lender gives you what amounts to a cash advance on your home equity -- no minimum income or credit score required. And you don't have to pay it back until you move or die, when the proceeds from the house sale typically will be used to close out the loan. But in fact, reverse mortgages have some serious drawbacks. Here's what you need to know.

You may not be able to borrow that much. A provision in the economic stimulus package raised the maximum home value that could be counted for reverse mortgages from $417,000 to $625,500. But you won't be able to tap your home up to its full price. The formula for determining loan amounts takes into account your age (the older you are, the more you can borrow) and current interest rates, as well as your home's value. Anything you owe on your home is subtracted from that amount, as are the loan fees you'll pay. To see how much you might qualify for, use the calculator at revmort.com/nrmla.

Expect to pay some pretty hefty fees. A reverse mortgage is an expensive loan. In addition to regular closing costs, you'll pay an origination fee of 2% on the first $200,000 of the loan balance and 1% thereafter, plus a mortgage insurance premium of about 2% and a monthly service charge as well. Though recent legislation has capped the origination fees at $6,000, by the time you add all the other fees you'll have to pay, the total generally reaches $10,000 to $15,000. So a reverse mortgage doesn't make sense if you expect to move anytime soon, says Dallas financial planner Michael Anderson.

There's more risk than you think. Reverse mortgages are particularly appealing to retirees looking to supplement dwindling income from a battered investment portfolio -- that's one reason these loans are up nearly 50% over the past two years. The big risk, especially for younger borrowers (you have to be at least 62 to get the loan): You'll live longer than you anticipate, run out of money, and won't have any home equity that you can fall back on. Over the past decade the average age of reverse-mortgage borrowers has fallen from 76 to 72. "One of the first questions to ask yourself is whether you can make the money last," says reverse-mortgage counselor Brenda Grauer.

Other options may suit you better. Before you can get a reverse mortgage, you'll be required to attend a session with a counselor who is not affiliated with a lender. This person is supposed to clearly explain the loan's terms and its drawbacks. But a recent study by the Government Accountability Office found that counseling sessions often fail to warn seniors of all the risks. So before you or your folks sign up, make sure you've looked into all the alternatives, such as cutting expenses, taking out a home-equity line of credit, or downsizing your home. Says Grauer: "It's best to put off taking this loan for as long as you can, so that when you really need it, the money is there."