60-Second Savings: Reverse Mortgages 101

As money becomes tight during the golden years, retirees are banking on their homes -- in reverse.

By taking on a reverse mortgage, borrowers aged 62 and older can cash in on the value of their home and avoid paying back the loan for as long as they live in the property. "That's a key advantage because if money's tight in retirement, you want to keep your expenses low. And you need a way to boost the income
-- a reverse mortgage really works to do that," says Greg McBride, senior financial analyst at Bankrate.com. Borrowers can generally receive their reverse mortgage in either one lump sum, a regular monthly cash advance or as a line of credit.

But while a reverse mortgage can offer much-needed supplemental income for retirees, McBride cautions it has some expensive downsides. "The biggest disadvantage to a reverse mortgage is the upfront fees that are involved. For example, you could give back 7% to 10% of your withdrawal in the form of fees. ... You don't actually pay this out of pocket, but it does come out of the proceeds given to you," he explains.

Other than the fees, homeowners' age and the property's location can affect the value. (Try the online calculator at Reversemortgage.org for an estimate of how much you could receive through a reverse mortgage.) The interest on the loan -- when its repaid -- can further cut into the amount.

So in other words, McBride continues, a couple of 65-year-olds who own their home free and clear may get less than half the house's value at that initial withdrawal. "Some of that's because of fees, some of that's because of their age. If you wait until later in life, you'll get more money. But those fees are a significant hurdle to clear."

On the bright side, the earnings from a reverse mortgage are typically free from taxes and many reverse mortgages have no income requirements. For more information, check with the American Association of Retired Persons or the Federal Trade Commission.

To view Farnoosh Torabi's video take of today's segment, click here.