How Does A Reverse Mortgage Work?

(CBS) -- It's a tax free source of income, but only 2 percent of seniors take advantage of it.

CBS 2 Cost Cutter Dorothy Tucker shows who could benefit the most from a reverse mortgage.

"It gave my dad the sense of independence," says financial expert Terry Savage.

She says a reverse mortgage can help people like her dad live comfortably in their own homes until they die.

It's like using your home equity as another retirement savings account.

"It comes out as a tax-free withdrawal for you to live on," Savage says.

A reverse mortgage works best for someone who owes little or nothing on the original mortgage and plans to live in the home for more than five years.

"Do your research, shop around and talk with a federally approved housing counselor," advises Jason Adler with the Federal Trade Commission (the FTC has information here).

He says fees, interest rates and restrictions vary. Plus, you still have to pay property taxes & insurance.

"Failure to do those sorts of things can make the loan immediately due and could eventually lead to foreclosure," warns Adler.

Here's something else to consider: When you move out of your home or die the balance due on the reverse mortgage loan will be paid through the sale of the house.

If the home sells for more than you owe, you or your estate will get money back. But if you've borrowed more than the value of the home, the lender keeps it.

"They can never charge your heirs more than the house is worth, you simply turn over the property to the reverse-mortgage lender," says Savage.

You have to be 62 to take out a reverse mortgage.

Savage suggests taking a monthly check, rather than a lump sum payment, which you might use up too fast.

The U.S. Department of Housing and Urban Development has more information here.