You can boost your retirement income with this special type of mortgage — but is it worth the risk?

"At an time when seniors are sitting on a mountain of housing wealth and have anxiety about their finances, this should be a well-used program. Instead, despite rising senior population, participation decreased between 2011 and 2018, from 73,112 to 33,000 mortgages," according to the 2020 article.

Reverse mortgages are different from traditional loans because they allow retirees to borrow cash against their homes without having to make monthly payments. Even as they borrow money, they get to stay in the house until they die. This can be attractive for seniors with too little savings and tons of equity in their homes.

However, there are also some downside risks to consider, which may make seniors rightly reluctant to sign up. Here's what you need to know about how these loans work and the pros and cons.

How do reverse mortgages work?

Reverse mortgages are only available to homeowners who are 62 or older. Lenders provide a loan that comes in the form of either a lump sum paid up front, steady monthly payments, or a line of credit. The borrowing limit depends upon factors like the borrower's age and the value of the home.

Unlike with a traditional mortgage, you aren't typically required to make payments on a reverse mortgage. However, you do still have to maintain the house, including paying taxes, HOA fees, and insurance on the property and keeping up with repairs. You are also charged interest each month on the borrowed amount, just as with a traditional lender.

As the interest accrues, this eats into the equity that you have left in the home. You own less and less of the house each year as you owe more to the reverse mortgage lender. When you move, sell, or die, the entire amount due has to be paid back at that time.

Is a reverse mortgage worth it?

There is an undeniable benefit to a reverse mortgage. Seniors can stay in their house and get equity out of it, which can provide them with financial relief if they are house-rich and cash poor. Tapping into equity also doesn't add another monthly payment to their bills, which they'd likely want to avoid if they're already facing financial struggles.

Money provided by a reverse mortgage lender also typically comes tax free, giving seniors more to spend — and it doesn't impact Social Security benefits.

Unfortunately, though, there are some huge downsides including:

• Costs and fees: Reverse mortgages are often much more expensive than traditional mortgages.
• Upselling: The Federal Trade Commission warns that many sellers of reverse mortgages also try to convince seniors to buy other financial products, often with the money they get from the loan. These products may not be in their best interests.
• Disappearing equity: Your balance grows every month you don't pay interest on a reverse mortgage. This eats away at your equity. You may end up having a very small ownership stake in your home so if you sell you'll walk away with very little. A large reverse mortgage balance also can make it difficult or impossible for your spouse to keep your home if you pass, or for your heirs to keep the family home after you die due to the amount that would need to be paid back after you're gone.

Before taking on a reverse mortgage, you need to be sure you understand these serious disadvantages -- and consider alternatives, such as downsizing to a less expensive property to cash in your equity. You'll also want to be 100% sure you know all the costs you're taking on, and not rush into a loan you don't really understand.