BOSTON (MarketWatch) — My, how things go full circle. A few years ago, before the housing market crashed, experts warned Americans against counting on the equity in their home to fund their expenses in retirement. Six years later, experts are singing — even in light of a still-depressed housing market — a slightly different tune, telling retirees and pre-retirees they will have to consider many tactics, including a reverse mortgage, to afford retirement.

Consider: Fidelity Investments this week joined the fray with a survey noting that working American households may face a potential 28% drop in income in retirement and that four in 10 retiree households already report not having enough income to cover their monthly expenses.

To bridge that income gap, Fidelity is telling folks to do the usual things: adjust their asset allocation, increasing the percent allocated to stocks; increase their savings; delay their retirement date; and annuitize their retirement assets. But Fidelity is also telling folks, as researchers at the Center for Retirement Research just did last week, to tap into their home equity.

According to Fidelity, 72% of people it surveyed own a home and 32% of homeowners have no mortgage. “Through downsizing and expense reduction, this home equity could be harnessed to generate income in retirement,” Fidelity said in its release.

John Salter, an associate professor in the Personal Financial Planning department at Texas Tech University, is among those who agree with Fidelity’s assessment that people will need to find ways to use home equity for retirement income. “Many current and future retirees’ homes will be one of their biggest assets, and this may be a resource moving forward that shouldn’t be ignored,” he said.

To be sure, Fidelity did not explicitly say “use a reverse mortgage.” But increasingly, advisers and others such as Salter are telling Americans to at least consider the product when building a retirement income plan. “I believe reverse mortgages will be a very important tool to consider now and moving forward with retirees,” Salter said. (Read the Center for Retirement Research at Boston College report, “How Important Is Asset Allocation to Financial Security in Retirement?”, which recommends the use of reverse mortgages here.)

According to Salter, reverse mortgages haven’t always been viewed favorably, but all that changed when the Federal Housing Administration (FHA) launched the Home Equity Conversion Mortgage (HECM) Saver in October of 2010. Prior to the HECM Saver, there was the much maligned HECM, which many viewed as an expensive product with upfront costs, upfront fees for insurance, closing costs, monthly service fees and the like.

“I came from the same camp as most financial advisers thinking the HECM was too expensive to be justified as a mainstream planning tool, but with the HECM Saver option, I have since reconsidered, and subsequently learned many of the benefits of the product that are quite attractive.”

Learn more about the differences between HECMs and HECM Saver at this website.

Benefits of reverse mortgages

Those benefits, according to Salter, include the following:

The loan benefit can be taken as a line of credit, tenure payments for life or term certain, or a cash-out.

It’s a non-recourse loan, meaning the liability to homeowner/estate is never more than the value of the home. The FHA insurance picks up the difference.

Interest or principal payments are not required.

The proceeds are tax free.

The interest, when paid, may be tax deductible.

The loan is not cancellable/callable (as with a home equity line of credit or HELOC).

Unused line of credit grows over time based on LIBOR rate, independent of home value.

Of course, older homeowners have to meet some requirements to qualify for a HECM Saver. For instance, Salter said the youngest borrower on deed must be age 62. Taxes and insurance must be paid on an ongoing basis, as well as the house maintained. The HECM Saver must be on primary home.

And, Salter suggested that there be little or no forward mortgage on the home, but this is not required. “Any remaining balance on a forward mortgage must be paid or rolled into the reverse mortgage,” he said. “If a forward mortgage exists there would just need to be an analysis completed to determine if there are means to pay off the forward mortgage and the benefit relative to doing so.”

There are, as is seemingly the case whenever the subject of reverse mortgages comes up, plenty of misconceptions that plague the product’s use and acceptance. For instance, although this was the case in the past, the bank does not own the home, Salter said. “A debt is accrued that must be paid off upon sale or death — up to the value of the home with the FHA-insured product,” he said.

Use reverse mortgages to produce income and manage risks

Salter also said older homeowners need to consider how reverse mortgages can be used to manage risks and to produce income in retirement.

For instance, Salter said, one can set up a line of credit for simple emergency reserves with a reverse mortgage, similar to what one would have done in the past with a traditional HELOC. Why would you do that? “Payments are flexible and the line cannot be called or cancelled, and of course the unused portion increases over time,” said Salter.

Another risk management feature: Consider using a reverse mortgage as a line of credit to fund living expenses during bear markets. That way you don’t have to sell or draw down depreciated assets during the bear market and you can pay off the reverse mortgage after the market recovers.

As for producing retirement income, Salter said, “the tenure payment feature (of a reverse mortgage) is quite appealing as it is designed to somewhat ‘annuitize’ the home value.” With the tenure payment feature, the bank pays a preset payment to the homeowner for life or can be set up as a term certain, which are payments for a certain number of years, said Salter. “This is something that may be attractive for the house-rich, cash-poor as they can develop a level of reliable retirement income that the portfolio may not produce,” he said. “The line of credit feature could also be drawn upon to supplement retirement income. The choice here would largely fall on factors such as income needed, life expectancy, and the like.”

One other attractive feature of the tenure payments compared to an insurance annuity, said Salter, “is that if the retiree passes say one year after payments have started, the assets used to purchase the insurance annuity are gone, however the reverse mortgage only needs to have the one year of payments plus interest repaid.”

Salter also said older homeowners who want to downsize might consider might consider a variation of the HECM called a HECM for Purchase. “That product can be used to finance part of a new home with a reverse mortgage, thereby being able to free up cash to use for creating retirement income,” said Salter.

And if all that wasn’t reason to give reverse mortgages another look-see, consider this. “The exact line of credit amount, which uses something called the Principal Limit Factor in the calculation, is based off of the 10-year LIBOR swap rate which can be thought of as the expected borrowing cost,” said Salter. “Since we are currently in a very low interest rate environment, the amount of the line of credit relative to the home value is very high compared to historical swap rates.”

So, Salter said, it’s is possible today for a 62-year old homeowner to obtain a line of credit that is up to half of the home value. “As rates go up, this obtainable line of credit will decrease,” he said.

This is not to say that all is wonderful in the world of reverse mortgages. For instance, there are fewer big name reverse mortgage lenders in the business today than a few years ago. For instance, Wells Fargo and Bank of America left the business last year, leaving just MetLife Bank as largest bank to service reverse mortgages. Read that column, “Banks abandon reverse-mortgage business.”

And there is the occasional story about some adviser scamming an older American into using a reverse mortgages to buy an unsuitable, high commission product.

But going forward, there’s likely to be plenty more research about how reverse mortgages can be used appropriately. For instance, Salter plans to study how reverse mortgages can be used to help older Americans delay taking Social Security benefits.

Still, despite the renewed interest and focus on reverse mortgages, Salter warned against thinking that the product is a panacea. “I believe all of the options of the product have a place, each is a tool that can be used to help a retiree’s situation,” he said. “The key is fitting the option to the exact need, there’s no one-size fits all option of the product, as with all financial products in a planning setting really.”