Reverse mortgages can be good tools to help retiring Americans’ financial stability. But, as with any financial service, potential borrowers need to be careful with whom they do business and beware of scammers looking to take advantage of unsuspecting victims. Most commonly, scammers promoting reverse mortgages try to take a fee for providing “help” that is available for free. Some unsavory lenders offer loans to people who will not benefit from the reverse mortgage, simply to take their cut.

By becoming educated consumers, people can avoid these traps and decide if a reverse mortgage is the best course. While these loans can be appealing (instead of making monthly payments, the bank pays you each month), they also are complex. Key components include:

• Reverse mortgages are available to borrowers age 62 or older.
• To qualify, you must have a significant amount of equity built up in your home. Homeowners with little equity will not gain enough from a reverse mortgage to make it worthwhile.
• Unlike a home equity line of credit, there is no monthly payment on a revere mortgage. A reverse mortgage pays you, the borrower, and is available regardless of your current income.
• Reverse mortgages typically having closing costs (fees) that are higher than those associated with a traditional second mortgage or home equity line of credit.
• You must pay off any existing mortgages with the proceeds from the reverse mortgage.
• The loan comes due when you sell the house, move out of the house or pass away. Thus, your home will not be left free and clear to your heirs. Heirs must repay the loan if they wish to keep the home.

If you believe a reverse mortgage could be for you, the next step is gaining a realistic view of how this loan could benefit you. For specific details, take these five steps before speaking with a lender.

• 1. Educate yourself. Many sources, both online and offline, provide helpful information on reverse mortgages, outlining factors borrowers should consider before taking a reverse mortgage loan. Two good resources include the the AARP, and the U.S. Department of Housing and Urban Development (HUD).
• 2. Understand your equity. Equity in a property is the difference between a property’s market value and the amount of claims held against it (such as mortgage loans or liens). If your home is paid off, your equity is the current market value of your home. If you have a mortgage, your equity equals your home’s value minus the balance of the mortgage.
• 3. Know how much you could borrow. The Federal Housing Authority regulates how much homeowners can borrow with a reverse mortgage. The amount varies with the home’s value and the borrower’s age. Get a ballpark figure with a calculator such as calculator such as AARP’s.
• 4. Determine the costs. Reverse mortgages are relatively expensive, requiring lenders to do more “upkeep” than traditional loans. Lenders must certify that borrowers continue to reside in the home. Also, lenders pay companies to make sure taxes and insurance are paid. Reverse mortgage fees are taken from the equity as part of the deal, but know they exist.

• 5. Get information for free. Do not fall for scams where you are offered “helpful” information about finding a lender for a “small fee.” Instead, call HUD at 1-888-466-3487. HUD will refer you to an approved counselor that will assist you for free. These counselors also can help you understand if you qualify for other benefits that might improve your financial situation.

You can learn more about reverse mortgages from Bills.com’s Reverse Mortgage Center. A reverse mortgage might be the right tool for you. The only way to find out is to learn all you can — and then make the best decision for your future and that of your heirs.

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