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Consider a reverse mortgage

Retirees short on savings can benefit from these complicated loan products where the bank pays you.

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By Gerri Willis, CNN

NEW YORK (CNNMoney.com) -- Mortgage payments sucking you dry? Boomers short on retirement savings may have another option: reverse mortgages. Can these complicated products fill the gap?

Know the process

Reverse mortgages are exactly that. Instead of paying the bank, the bank pays you. It's a type of loan where your equity is converted into cash.

These mortgages are designed for people 62 and older. And you can get this cash in a few ways: Either you can get it all in a lump sum, a monthly payment or a line of credit that you can tap into when you need it.

The loan doesn't need to be repaid if you continue to live in the home. But if you move, the debt must be repaid - with interest. If you die, your heirs can elect to sell the house to repay the loan.

While the payment doesn't usually affect social security or Medicare, it may affect Medicaid according to Peter Bell of the National Reverse Mortgage Association.

You will also be responsible for property taxes and any repairs on the home.

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

Consider your Candidacy

The older you are, the more likely you are to benefit from a reverse mortgage according to AARP.

First, you'll probably have built up more equity in your home. And lenders calculate the payout based on your age and your expected lifespan. Reverse mortgages are most beneficial if you own your home or have a small amount left to pay on the original mortgage that can be paid off at closing with the proceeds from the reverse loan, according to HUD.

Reverse mortgages are also best for people who want to remain in their home for the long-term. If you're looking to move in two or three years, a reverse mortgage may not be right for you.

Weigh the Downsides

Fees on home equity conversion mortgages can be high. For a $300,000 loan, a person who is 74 years old can expect to pay $15,000 in upfront fees according to AARP. There is an origination fee, appraisal fee, title fee, escrow fee, recording fee, a monthly servicing fee and an ongoing mortgage insurance premium.

Bell says the total of these fees are about 5% of the home's value. They can be included in your loan balance, if there is enough equity available.

Remember - a reverse mortgage is a loan with rising debt and falling equity. So, if you get a lot of cash over the years, there will be little, if any, left over for your heirs according to AARP.

Do your homework

Reverse mortgages, while only one percent of the mortgage market, are on the rise. There were less than 7,000 reverse mortgages in 2000. Last year, over 107,000 reverse mortgages were sold according to AARP.

There are a lot of nuances you should consider before buying a reverse mortgage. In fact, you are required to get counseling before buying this product.

You can contact the Housing Counseling Clearinghouse at 800-569-4287 to find a lender in your area. Your bank should give you a list of counselors in your area that can help you. Be wary of lenders that try to get you to buy more products, like long term care insurance or annuities.

To get an online guide to reverse mortgages, check out aarp.org. To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.