WHEN Peter and Joyce Hill wanted to buy a home in a community for people 55 and older in an area they had always admired in Lancaster County, Pa., they used a reverse mortgage to finance building in that development.
“A reverse mortgage gave us the option to build what we wanted,” said Peter Hill, 79, who retired two years ago from a career in telecom engineering. “That appealed to us.”
Reverse mortgages — which let homeowners 62 and older tap their accumulated home equity without facing monthly payments in return — earned a bad reputation over the years when they were subject to widespread abuses by lenders.
The volume of these mortgages dropped to around 30,000 this year from about 115,000 at their peak popularity in 2009, according to the Federal Housing Administration. But with reforms in the system, they are making a modest comeback, seen as a way of helping some retirees fill gaps in their future income.
They can provide cash or “longevity insurance” when other sources of retirement income come up short or provide money for out-of-pocket health care costs or other sudden financial crunches.
Like a conventional mortgage, a reverse mortgage obligation is satisfied when the house is sold by the owners, the last owner has died or the home is sold by heirs. Any equity left over is kept by the last homeowner.
Since these loans, also known as Home Equity Conversion Mortgages, are insured by the government, the Federal Housing Administration will cover any shortfalls between the final loan balance and net proceeds from the sale. That means you don’t have to worry about being “underwater” on the loan in case the home’s value is less than the mortgaged amount.
“They’ve always been there as a last resort,” said John Salter, a financial planning professor at Texas Tech. “But they make a lot more sense now because home equity can be a big part of net worth.”
Although still little used, reverse mortgages can allow retirees with only modest savings but little or no housing debt to stay in their homes, while also providing a financial backstop for those concerned about outliving their retirement funds.
Ms. Hill noted that their reverse mortgage, which they took out on the new home they were building, took away the burden of conventional housing debt, the monthly payments of interest and principal, and assured their heirs that they would never have to make up any losses if the home sold for less than the value of its mortgage. “That gives us freedom of mind,” she said.
Reverse mortgages got off to a bad start when they were introduced more than 20 years ago, but they have redeemed themselves in recent years, supporters say, under tighter regulation from the F.H.A. and the Consumer Financial Protection Bureau.
Jamie Hopkins, a professor at the American College of Financial Services, said a combination of lower costs and better consumer protections — counseling is now required before lending — helped encourage some financial planners to start recommending them.
Mr. Hopkins has found “that many people don’t have enough money to get through retirement, so they have to consider using all of their wealth, including home equity as a retirement income source.”
For others, reverse mortgages can also bolster a cash buffer when a stock market swoon hobbles a retirement portfolio. Instead of selling stocks and funds when the market is down — which is often a better time to buy — people can tap home equity through a reverse mortgage line of credit to provide an income stream.
“People have peaks and troughs in demands for cash,” said Peter Bell, president of the National Reverse Mortgage Lenders Association, an industry trade group. “When they have peak demand, they may make poor decisions and cash in investments.”
Another reason older people may turn to a reverse mortgage is to finance the costs of long-term care.
Although a source of ready cash, reverse mortgages aren’t right for everyone. If you want to provide a bequest to your heirs by allowing them to sell your home upon your death, a reverse mortgage can wipe out much of the equity in your home.
“Reverse mortgages are off the table if you want to leave your home to your kids,” Mr. Hopkins said.
These loans are also challenging for those who have to move because of a disability, are selling a home after a short period or are relocating.
When considering a reverse mortgage, take your time and do the math. How long do you plan to stay in the home? How much will you qualify for based on your age and home value? How will the cash be used? Will you need the cash right away? Would you prefer a line of credit that you can use at a later date?
In addition to understanding how reverse mortgages would fit into your financial plan, you will need to shop around. Like other mortgages, they have closing costs, which range from $4,000 to $15,000, though those amounts typically are not paid upfront because they can be added to the loan’s principal. Rates can be either variable or fixed.
A good place to start is the F.H.A.’s website, which provides a mortgage calculator and counselor referral at 800-569-4287. Another good source is reversemortgage.org.
You can also find some concise consumer protection guidelines on the Consumer Financial Protection Bureau’s website: consumerfinance.gov.
If your needs are more sophisticated — you, for example, want to know how a mortgage could dovetail with your existing retirement assets, estate planning and goals — it would be good to work with a certified financial planner or a certified public accountant who does financial planning.
Consult an elder-law or estate-planning lawyer if you intend to include your home in a legacy plan.
Keep in mind that even if you don’t understand the terms of these loans at first, you will be required to speak with a trained counselor before you sign up for one. And there are plenty of rules you’ll need to know. For example, the loans are not available for rental properties; they are available only for owner-occupied principal residences.
You need to know all the features of these loans before approaching a broker or bank. Although they could appear to be ready, secure sources of cash during your most vulnerable years, they are still complex vehicles that ideally should be used only as part of a sound overall retirement plan.