Like millions of Americans, Bill and Helen Bluett's greatest financial asset is their home, a Spanish-style dwelling just a quarter of a mile from the ocean in San Clemente, Calif.
Selling the place and buying a cheaper one elsewhere could have brought the couple hundreds of thousands of dollars in extra money for their retirement years. But there was one problem with that idea.
"We love our home," said Bill Bluett, 67, a retired mechanical engineer. "We love our neighborhood. As long as we're physically able, we want to stay right where we are."
So this year, the Bluetts signed up for a reverse mortgage, a type of loan that allows older borrowers to tap their home equity without making payments as long as they live in the house.
With the money, the Bluetts are more than able to take on projects like remodeling the kitchen and bathrooms. More important, Bill Bluett said, the reverse mortgage makes them financially prepared for "any emergency, whether it's medical or whatever, that might come up" in the years ahead.
"My wife and I decided it would give us a lot of peace of mind," he explained.
Reverse mortgages have been criticized for high upfront costs. Lenders may charge 2 percent of the loan amount in origination fees, and most borrowers also pay 2 percent for mortgage insurance, along with other fees that can far exceed those in conventional home loans.
Loan amounts often are subject to strict limits, which vary based on location, and many financial planners still are not familiar enough with reverse mortgages to guide their clients.
But in an era when legions of older homeowners are sitting on vast amounts of untapped equity, reverse mortgages seem to be catching on. Competition has started to push down costs, and lenders are beginning to offer loans on unlimited amounts, a noteworthy shift in an industry that has mostly relied on federally insured mortgages with strict caps.
After years on the sidelines, Wall Street has entered the game, with investment banks for the first time purchasing such loans in a secondary market, which may further stir innovation and encourage more lenders to offer reverse mortgages.
At the current rate, lenders could sell more than 100,000 reverse mortgages this year, more than double the number from 2005.
"The significant thing in the last several months is that the big boys are coming in," said Bart Johnson, president of Irvine, Calif.-based Financial Freedom Senior Funding Corp., a leading provider of reverse mortgages. "The last six months to a year have been incredible."
Housing and Urban Development Secretary Alphonso Jackson recently described reverse mortgages as "the bright spot in today's housing market," adding that "their significance will only increase as more Baby Boomers reach retirement."
In a conventional mortgage, the lender lends you money to buy a house, and you gradually pay down the debt and build up equity as you make monthly payments.
In a reverse mortgage, the lender gives you the money--as a lump sum, in monthly installments or as a line of credit--and takes your home equity as payment.
Typically, reverse mortgages don't have to be paid back until you sell your home, move or die. People must be at least 62 to qualify for a reverse mortgage.
As with all loans, reverse mortgages have fees and charge interest. For example, a 78-year-old borrower whose home is worth $200,000 might end up with a reverse mortgage of $123,000, based on his age, interest rate levels and other factors. In this case, the borrower might pay about $13,000 in upfront fees, including a $4,000 loan origination fee, $4,000 in mortgage insurance and a $4,000 "set-aside" to cover servicing costs for the life of the loan, according to Fannie Mae, the federally chartered lender.
Based on recent interest rates, such a loan might come with an adjustable interest rate of about 6 percent, with interest charges compounding during the life of the mortgage.
Given that, homeowners should carefully weigh their options, experts say.
Home-equity loans can be a cheaper way to come up with cash for people willing and able to make payments in retirement.
Selling the house and downsizing to a cheaper dwelling is another alternative, depending on the borrower's priorities.If the goal is simply home repair, seniors should explore whether their communities have low-cost loans available for that purpose, said John Rother, director of policy and strategy for AARP.
"It's good to have the option," Rother said of reverse mortgages. "But it's not an option appropriate for everyone."
But for people who are long on home equity and short on cash, the reverse mortgage offers a key advantage: Borrowers don't have to pay back the loan as long as they stay in the house. Indeed, a reverse mortgage may be the only way that some people can afford to stay in their own home.
"People who are using them, by and large, have a huge degree of satisfaction," said Peter Bell, president of the National Reverse Mortgage Lenders Association, whose membership has more than doubled over the last few years, to 540 firms. "For a senior with a fixed income, taking on a loan with monthly payments doesn't make a lot of sense."
Most reverse mortgages are insured by the Federal Housing Administration, but loans insured by the agency are capped at $362,790 in higher-cost regions such as Southern California. In lower-cost areas, the cap is as low as $200,160.
In some cases, older borrowers seek reverse mortgages to gird for future medical bills. Malcolm Greenhill, a financial planner in San Francisco, recalled a 72-year-old client with emphysema who feared his health would decline further but lacked the income to pay for in-home care. The man's home was worth $1.2 million.
"I put his mind at rest and said there's a way here that you can tap into your equity," Greenhill said. "A reverse mortgage would be a good option for somebody like that."
Increasingly, big lenders are stepping up efforts to market the loans and starting to offer some breaks in their cost. They are motivated, in part, by the high level of homeownership among older people. And they are aware that aging Baby Boomers will be making big-ticket retirement decisions in the coming years.
As some see it, reverse mortgages are destined to become increasingly popular as the more than 75 million Baby Boomers head into old age. Boomers may prove much more comfortable with accepting debt in old age than today's seniors. Beyond that, many could face financial hardship because of a squeeze on pension benefits and increases in health-care costs.
"In the future we'll see new vehicles, new pricing, new ways of pulling out just the amount of money that you need," said Michael Boone, a financial planner in Bellevue, Wash. "I fully expect a reverse mortgage to be as normal as a 30-year fixed."
Jonathan Peterson is a staff reporter for the Los Angeles Times, a Tribune Co. newspaper.