Many older Americans nearing or already in retirement will find out (if they haven’t already) that they should have done a better job of saving over the years. This lack of adequate retirement savings will tempt many people to tap into the equity in their homes for much-needed cash. One way to do this is by taking out a reverse mortgage on their homes.

A reverse mortgage might sound like a great idea, but it’s important to understand the requirements, risks and costs before signing on the dotted line.

Here are some basic facts about reverse mortgages:

• You must be at least 62 years old and have sufficient equity in your home to  qualify.
• You borrow money from a lender (lump sum, fixed monthly payments, or line of  credit) and generally don’t have to repay the loan as long as you continue  living in your current home. Interest on the amount borrowed accumulates until the loan is  repaid.
• The loan must be repaid when you die, sell your home, or when the home is no longer your primary residence, with some exceptions. Until then, no loan repayments are  required.
• You retain ownership of your home.
• Proceeds are usually tax-free with no income restrictions.

The most common reverse mortgages are called Home Equity Conversion Mortgages (HECMs) and are backed by the U.S. Department of Housing and Urban Development. Reverse mortgages are also offered by some state and local governments, non-profit organizations, banks and private lenders. Some reverse mortgages stipulate that the money must be used for a specific purpose, such as repairs or improvements.

Be aware of the following, though, before deciding whether to obtain a reverse mortgage:

• Fees and other costs. Origination fees, mortgage insurance  premiums, other closing costs, and ongoing service fees can add up – sometimes to the tune of more than 10% of the loan amount.
• Increasing loan balances. Interest accrues on the amount borrowed and is added to the principal balance.
• Variable interest rates. Most reverse mortgages charge variable interest rates that are tied to a specific index, so rates could  significantly rise during the loan period.
• Affect on eligibility for entitlement  programs. Reverse mortgage  proceeds are considered an asset of the borrower, possibly resulting in the borrower becoming ineligible for programs such as Medicaid.
• Repayment risk. The loan balance generally becomes due when the borrower moves out of the home, for example, into a nursing  home. This might force the borrower  to sell his or her home to pay off the loan.

It’s very important to shop around, and to know the fine print, when considering a reverse mortgage. If you are unsure of your ability to make a proper decision and avoid caving into sales pressure, seek the advice of a trusted adviser.