The most popular reverse mortgage has been the Home Equity Conversion Mortgage insured by the Federal Housing Administration. But the loan limits may be too low for seniors with higher-priced real estate.
To serve that end of the market, more lenders are offering proprietary reverse mortgages.
Lenders say reverse mortgages also are gaining appeal among seniors who want to avoid capital gains taxes on the sale of stocks. Instead, they're tapping their home equity for regular income and allowing their investments to continue to work for them. When they die, their heirs get their stock, without the capital gains tax liability.
In Texas, the reverse-mortgage business picked up momentum in 2005 once the state let borrowers draw from a line of credit. A majority now prefer that option to lump sum or monthly payments, said Scott Norman, president of the Texas Association of Reverse Mortgage Lenders.
"People like the flexibility," he said. "You can draw on it when you need it. Plus, you don't pay interest on any more money than you actually use."
Despite their benefits, reverse mortgages are no magic bullet. Financial planners say the loans may make economic sense for some seniors but not others.
The cost of borrowing can be steep. Origination fees and mortgage insurance will run 4 percent of the home's value or the maximum lending amount on the FHA loans, whichever is less. Other closing costs may total at least $1,000.
"On a $120,000 house, you're looking at $6,000 to $7,000 in fees," said Wayne Lancaster, senior loan officer for Bankers Financial Mortgage Group in Plano, Texas.
Also, the amount that someone receives from a reverse mortgage is considerably less than the house's appraised value. The exact amount depends on such factors as the borrower's age, the type of reverse mortgage, the home's value and current interest rates.
The older the borrower, the more money that person will get.
"A 62-year-old might get 45 percent of the home's value, while a 92-year-old might collect 70 to 75 percent," said Jim Elder, area sales manager for reverse mortgages at Countrywide Bank in Dallas. "The rest of the equity is to cover the interest."
Because of such considerations, Bill Clark, a retirement and estate planner in Frisco, Texas, recommends that his clients consider other ways to tap equity, such as downsizing.
"One option is to sell your house, then buy a smaller one and invest the rest," he said. "The interest or dividends can supplement your other retirement income."
One oft-cited drawback to reverse mortgages: Many older adults consider it important to pay off their mortgages and pass that asset onto their children.
Karen Kennedy, a reverse-mortgage specialist with One Reverse Mortgage in Dallas, said she urges her clients to sit down with their children and discuss what they're contemplating, so no one is surprised later.
"More often than not, there's no objection," she said. "In fact, the children sometimes are the ones who come to me and raise the idea in the first place. They only want the best for their parents, and they know a reverse mortgage may be able to provide that."
Peter Bell, president of the National Reverse Mortgage Lenders Association, predicts the next generation of seniors will be unsentimental about using their homes as a resource in retirement, partly because they'll have no choice.
Social Security's retirement age is rising. Traditional pensions are fading. The balances in 401(k) accounts are falling short of where they should be. And the average life expectancy continues to grow. Boomers are banking on home equity to rescue them.
"The oldest boomers turn 62 next year and will begin qualifying for reverse mortgages," Bell said. "That generation has always been accustomed to financial services."