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Answer these important questions before deciding.
Answer these important questions before deciding. / White Packert/Getty Images

Reverse mortgages can help older people in need of extra cash. But they have caveats. Reverse mortgages allow homeowners ages 62 and older to access their home’s equity for any financial purpose. If the owner remains in the home, the loan doesn’t have to be paid back (payback occurs when the home is sold).

Unfortunately, there are drawbacks. Although the new federally backed Home Equity Conversion Mortgage Saver Loan is cheaper than older versions (upfront mortgage insurance premiums are 0.01% of a home’s value vs. 2%), borrowing limits are smaller and interest rates higher. Add to that annual insurance costs of 1.25% of a home’s value.

“Throw in the loan-origination fee, appraisal and other upfront costs, and we’re potentially talking big bucks,” says Ray Brown, co-author of Mortgages for Dummies.

Here are two important questions to consider:

Will you stay long? The longer you stay in your home, the more you can spread out the expense.

Does your home fit? “A reverse mortgage enables some folks to remain in a house that’s highly unsuitable for them — too big, too many stairs, not energy-efficient,” Brown says. “Downsizing into a smaller, lower-maintenance home is one way to free up the equity in your big, old empty nest.”

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