In an earlier article, Converting Nest to Nest Egg, we examined the basic features of the reverse mortgage. In the intervening months we've begun to see a lot more about reverse mortgages, and the reason is pretty simple. The FHA-insured Home Equity Conversion Mortgage (HECM), which accounts for 90% of all reverse mortgages, has zoomed in popularity. Although the product has been around for 17 years, about two-thirds of all such mortgages were issued during the past three years. In fact, the 2006 FHA fiscal year, which ended Sept. 30, saw a 77% increase in new HECMs.

While this looks like an industry boom, it's merely a hint of future growth as the aging boomers become eligible for reverse mortgages. No doubt a key driver will be the incentive to cash in some home equity after the dramatic rise in home values over the past several years. As explained in the previous article, all homeowners on the deed must be age 62 or older. Thus, the earliest boomer HECMs won't begin appearing on the charts for another year or two.

So should boomers start applying for reverse mortgages at age 62? Definitely not! This product is most suitable for the older household with limited retirement income but substantial home equity. It offers an alternative to a traditional mortgage or home-equity line of credit (which would add monthly payments), downsizing, or switching from home ownership to renting. After reviewing these alternatives, if a reverse mortgage seems like the best option, there are still compelling reasons to proceed slowly.

Cheaper Products in the Pipeline

One reason to delay, at least in the short term, is to take advantage of new reverse mortgages products in development that are expected to lower the initial loan cost, which can range from 6% to 12% of the loan amount

Ken Scholen, the director of the AARP Foundation's Reverse Mortgage Education Project, explains that the increasing demand for these mortgages is triggering competition among lenders. Also, as more mortgages are issued, the lenders have access to more statistics on this type of loan, which is still in its infancy as compared to traditional home mortgages. "There are at least four new products in development," says Scholen. "If you don't need to do it in the next year or so, definitely wait and see."

Older Is Better

There's an even more compelling reason to delay: The older the applicant, the greater the loan value. Like traditional mortgages, reverse mortgages are based on the appraised value of the property. But a reverse mortgage also has an actuarial component. Lenders calculate the loan amount based in part on life expectancy. You can explore the implications of age by using the excellent reverse mortgage calculator at www.reversemortgage.org. You'll discover that a home worth $200,000 would produce a lump sum advance of around $96,000 (depending on your location). Waiting 10 years increases the amount by over $20,000, and waiting 20 years increases the amount by about $43,000. And those numbers assume no change in home price. But ...

Higher Equity Over Time

Like the stock market, the housing market is cyclical. But over time, houses usually appreciate in value. Thus, the longer you wait, the higher the appraised value, and the greater the reverse mortgage payout (up to the FHA mortgage limit). Also, if there's an existing mortgage or line of credit on the home, the additional time to whittle down debt will produce a more attractive reverse mortgage.

Choosing Your Payout Option

In addition to delaying, another strategy to consider is minimizing the payout. A reverse offers three ways to access your home equity: a lump sum, a series of periodic payments, or a line of credit (or some combination of the three). The simple rule of thumb is this: the faster you remove equity from your account, the more the interest you'll accrue, and the higher the final payoff. If you take a lump sum, interest on the loan begins growing at a healthy clip. However, if you tap the equity infrequently in small amounts, you'll be accruing interest only on that limited amount. In fact, if you make only small, infrequent withdrawals from a line of credit, you could receive periodic increases in the available funds as the property value increases.

Ultimately, the smart way to view a reverse mortgage is as an end-game strategy. Think of it as a guaranteed full house in the poker game of life. You don't want to play that hand too soon.

Useful Reverse Mortgage Links

http://www.ftc.gov/bcp/conline/pubs/homes/rms.htm Uncle Sam's brief overview -- clear and concise.

http://www.aarp.org/money/revmort AARP has been a major force in shaping the industry.

http://assets.aarp.org/www.aarp.org_/articles/revmort/homeMadeMoney.pdf This brochure is "must" reading for anyone seriously considering a reverse mortgage.

http://www.reversemortgage.org The NRMLA (National Reverse Mortgage Lenders Association) website -- check out the calculator!

http://www.fanniemae.com/global/pdf/homebuyers/moneyfromhome.pdf This detailed overview covers both the HECM and the Fannie Mae Home Keeper.

This article appeared in the January 2007 Motley Fool Rule Your Retirement newsletter.