What you need to know about reverse mortgages

Thanks to new federal rules, reverse mortgages don't have to sting as much at the outset. Previously these loans -- which let owners 62 or older borrow against their home and don't have to be paid back until the owner moves or dies -- always carried high upfront fees.

A new option, called a HECM Saver, cuts the initial insurance premium -- one of the biggest costs -- from 2% to 0.01% of your home's value. On a $400,000 home, that means paying $40 instead of $8,000.

Another welcome change: more thorough mandatory counseling for potential borrowers, which is designed to make sure you really need a reverse mortgage, understand it, and can afford to stay in your home even after taking out the loan.

Banks are also cutting deals on fees, which can add up. The traditional reverse mortgage, called HECM Standard, still carries that 2% upfront premium. On all types of these loans, origination fees can hit $6,000. And you're on the hook for closing costs, including an appraisal and title insurance.

But today some lenders will pay more than half of the initial premium and waive origination fees, says John K. Lunde of analytics firm Reverse Market Insight. Start your shopping at the lender directory at reversemortgage.org.

The new fee structure could make reverse mortgages appealing to far more homeowners. Up to now the high upfront fees have turned off most seniors the majority of borrowers use the proceeds to pay off a regular mortgage.

The HECM Saver, says Barbara Stucki of the National Council on Aging, "puts conventional wisdom on its head." For example, reverse mortgages let you opt for a line of credit. With no credit check needed and potentially lower fees than on a HELOC, the loan could be the best way to set up an emergency fund.

Picking the right loan remains tricky. Do you want a lump sum (with a variable or fixed rate?) or the variable-rate credit line or monthly payment options?

The new HECM Saver adds another wrinkle: The amount you can borrow a function of your age and your home's value is lower than it is with a HECM Standard. A 65-year-old in a paid-off $300,000 Illinois home could net $182,000 with a traditional loan but only $146,000 with a HECM Saver, according to MetLife Bank. To see your options, visit AARP.

You may not feel a cash pinch now, but someone will later. No matter what kind of reverse mortgage you take out, you'll be charged not just interest but also a 1.25% annual insurance premium on the outstanding loan balance (up from 0.5%).

You don't have to pay interest and premiums during the life of the loan (you are still responsible for taxes, homeowners insurance, and maintenance, though). Instead, the bill comes due when your house is sold. So your heirs will collect some cash only if the sales price is higher than the loan balance and total lifetime fees.