A reverse mortgage could help you pay for retirement -- or it could cost you and your heirs a lot of money.

The housing boom of recent years has fueled record growth in these products, which give homeowners an income stream they don't have to repay until they sell their home or die. But reverse mortgages have long been weighed down by high costs and complexities. Now, they're coming in for a makeover that may save consumers thousands of dollars.

Sensing growth opportunities as baby boomers retire, financial-services firms such as IndyMac Bancorp Inc. (NYSE: NDE) and the privately held Seattle Mortgage Co. have been cutting the costs of reverse mortgages and offering special deals. Now, big national lenders are eyeing the market: Bank of America Corp. (NYSE: BAC) recently waded into reverse mortgages with a pilot project in Phoenix, though it won't say when it plans to roll out the program nationally. Countrywide Financial Corp. (NYSE: CFC) says it expects to launch a new reverse mortgage in 2007. The competition from both is expected to put further downward pressure on costs.

The federal government, meanwhile, is trying to push down costs as well. The Department of Housing and Urban Development, which insures most reverse mortgages, is looking into lowering the origination costs and mortgage-insurance premiums that homeowners pay, according to HUD officials. At the same time, Ginnie Mae, a federal housing-finance agency, announced in October that, for the first time, it will begin packaging reverse mortgages for sale on Wall Street. Ginnie Mae's move is widely expected to lower interest rates that consumers pay, since studies have shown that the agency's guarantees in the traditional mortgage market lower rates by between 0.5 percent and 0.8 percent.

"Lots of forces are at play right now that are working to bring costs down for consumers," says Ken Scholen, director of the AARP Foundation's Reverse Mortgage Education Project. While the changes are still taking shape, he says that in 2007, consumers "will have lower costs and more choice. If you're not facing a really urgent need for cash, the smartest thing you can do is wait."

With a reverse mortgage, homeowners at least 62 years old can tap into a portion of their home's equity without selling their house or taking out a home-equity loan, which can strain monthly finances. Unlike a traditional mortgage requiring monthly principal and interest payments, a reverse-mortgage lender pays the homeowner instead.

Borrowers have several options for receiving the money. Most opt for a lump-sum payment while others choose a line of credit. Some prefer equal monthly payments that last for as long as a borrower remains in the home. (The sum of those payments can stretch beyond the value of the house, in which case the lender will book a loss.)

Reverse mortgages are so-called rising-debt, falling-equity loans, meaning that as debt increases, home equity falls. Lenders recoup this debt -- the accumulated principal and interest payments -- when the home is sold. The debt can never exceed the value of the home, and any remaining equity returns to the homeowner, the estate or heirs.

Roughly 90 percent of all reverse mortgages are insured by the government through a so-called Home Equity Conversion Mortgage, or HECM. Those mortgages cannot exceed a certain amount, regardless of how much the house is worth. The remainder are not insured by the government. These are typically "jumbo" reverse mortgages tied to pricier homes, and they generally provide greater income, though at higher costs.

In the year ended Sept. 30, homeowners took out a record 76,351 reverse mortgages, according to the Federal Housing Administration. That's an increase of 77 percent over the previous year. Overall, half of all reverse mortgages ever issued have come in the past two years.

Though the market is relatively small -- nearly 7.4 million traditional mortgages originated in 2005, by comparison -- it's expected to surge as the crush of some 70-plus million baby boomers hits retirement.

Despite their growing popularity, reverse mortgages are not for everyone. Sylvia Heitzmann, a 77-year-old widow who has lived in her La Jolla, Calif., home for 42 years, says she wanted to generate additional income to help afford her needs, as well as those of a handicapped child. A flier in the mail encouraged her to inquire about a reverse mortgage.

But before she took the leap, her financial planner convinced her that she'd be better off increasing the income from her nest egg instead of paying the costs of a reverse mortgage. "For someone who is house rich and cash poor, a reverse mortgage can be a real saving situation, a valuable way to tap your equity and stay in your own home," says the planner, Gil Armour of San Diego. However, he cautions, too few homeowners recognize that they'll pay sizable fees.

Lenders currently charge an origination fee of up to 2 percent of the home's value, not the smaller loan amount. A mandatory mortgage-insurance premium adds another 2 percent. Borrowers also pay various closing costs typical of a traditional loan. Thus, the upfront costs on reverse mortgage can exceed $12,000 for a $250,000 home. Pricier houses can mean combined fees that are even higher. Borrowers also pay monthly charges that can add thousands more over the life of a reverse mortgage.

Under federal rules, all consumers who obtain an HECM product must undergo financial counseling to ensure they understand the mortgage they're getting. Lenders providing non-federally insured reverse mortgages also generally require counseling as well.

One concern mentioned in the counseling sessions: Reverse mortgages put a bundle of cash into a consumer's hands, marking an enticing target for financial-product sellers to exploit. Heitzmann says the sales rep she talked to tried to convince her to buy an annuity with the proceeds. Though the industry says such tactics are rare, California, which originates more reverse mortgages than any other state, recently passed a law that, among other things, specifically bans mortgage lenders from pitching an annuity to consumers as part of the mortgage process.

"We don't know how much of this is occurring, but it doesn't make sense to take out a reverse mortgage to invest the proceeds," says AARP's Scholen. "You're not going to get a return greater than (the cost of) the loan. It's a losing proposition."

How much a homeowner ultimately receives in a reverse mortgage is based on a person's age, the location and value of a home and prevailing interest rates. The older the borrower and the lower the rates, the larger the income.

Urban vs. rural geography plays a big factor in the equation. Rules for federally insured reverse mortgages limit how much of a home's value a homeowner can tap. The current limit in urban areas is $362,790, while most rural areas top out at $200,160. The federal government is considering a single national limit, though nothing has been proposed yet.

Jumbo mortgages, which have no limit, provide greater income to owners of higher-value homes, regardless of the home's geographic location. The catch: These mortgages come with interest rates that can be as much as two percentage points higher.

Regardless of a home's worth, lenders will finance only a portion of its value. In a program launched this fall by Reverse Mortgage of America, a unit of Seattle Mortgage, for instance, a 68-year-old homeowner with a $1 million house could get a jumbo reverse mortgage of about $386,000, according to the company. With an HECM loan, that same homeowner would receive no more than between $108,000 and $210,000, depending on location. At age 72, a homeowner with the same $1 million house would get about $434,000 through a jumbo mortgage. At 80, the value jumps to $494,000.

At the same time, Reverse Mortgage of America has also begun to waive the origination fee or provide a credit, depending on the mortgage amount. Meanwhile, Financial Freedom, a unit of IndyMac Bank, this summer lowered fees and restructured its reverse mortgages so that consumers receive about 50 percent more in cash than they did previously. Through the year's third quarter, the firm has funded 36,000 reverse mortgages, 16 percent more than the 31,000 it funded throughout all of last year.