One size doesn't fit all

Q. In a recent column, you said: "A reverse mortgage can be an excellent plan for some elderly homeowners." Can you tell me the circumstances under which it would be an excellent plan? Hubby and I are in our early 60s and have no kids. Our house is paid off. Our current will leaves our house to our church and a charitable organization.

As retirement age looms, however, we're wondering if we'd be smarter to gradually sell it back to a bank so we can keep living here. But my sister-in-law, a CPA, says if we outlive the payback period, we have to leave the house - and I doubt we'd want to. And our financial adviser says he's "not fond" of reverse mortgages, although we have not yet asked for his reason (it was a side comment).

So can you tell us what factors determine whether it's an excellent plan, a terrible plan, or somewhere in between?

A. Like most financial moves, a reverse mortgage can be excellent for some people and wrong for others.

When you write you're considering one "so we can keep living here" you're describing the exact reason those mortgages were designed in the first place. They're intended to help older homeowners who want to remain where they are, but can't do it without more income - and can't get more income without selling the house.

You wouldn't "gradually sell the house back to the bank." As with any mortgage, you'd remain owners of the property, paying your own taxes and insurance.

"Gradually" does describe, though, the way your debt builds up, because you wouldn't be making any payments. The whole thing - closing costs, money you receive, interest, mortgage insurance premiums - just keeps piling up unpaid. It doesn't have to be paid back until you decide to move out, or die.

That's where your sister-in-law misunderstands the process. You never have to leave if you don't want to. If you end up borrowing more than the house is worth, neither you nor your heirs ever have to make up any shortfall. It is eventually covered by that mortgage insurance.

Your financial adviser may be thinking of ways in which reverse mortgages were abused in earlier years. Some lenders would talk homeowners into choosing lump sum payments instead of monthly income, then immediately turn around and sell them costly, inappropriate "investments." That's no longer allowed, and limits have been put on upfront closing costs. As with any mortgage, of course, it can be foolish to incur closing costs if you plan on remaining in the property for only a year or two.

See the next letter for an example of someone who borrowed on a reverse mortgage for the wrong reasons.

Q. Regarding a question of reverse mortgage fees after closing, the answer is yes, there are fees, providing any portion of the reverse mortgage loan is moved to your personal account. The loan company will immediately begin charging the fee on the loan amount moved and a second fee to HUD to pay for the yearly mortgage insurance. All fees and closing costs are charged to the loan so the total borrowed becomes larger. But to get out of the reverse mortgage, you must pay the total figure of the loan, even if you never used the money.

We thought it would help in purchasing another house in case ours didn't sell, but after a couple of years of house hunting we decided to stay put and it cost a lot money to get out of the loan. All those fees added up. That fee we owed to HUD paid us nothing. We never used the reverse mortgage for our benefit.

A. Reverse mortgages were set up to enable cash-poor seniors to remain in their homes. No one ever said you could borrow the money and just stash it in your own account, for free.

Let me translate some of your wording: When a "portion … of the loan [was] moved to your account" that sounds as if you chose to receive a lump sum rather than monthly checks. So yes, they did indeed "begin charging the fee on the loan amount moved." That wasn't a fee; it was interest on money you'd borrowed.

You owed that interest, even if you ended up never using the money. There must be more to the story if you had to "get out of the loan" while you were still living in the house, because that's not how it works. Or maybe you just wanted to clear it all up when you realized you weren't going to need the money after all.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

© 2015, Creators Syndicate Inc.