Dear Mr. Premack: Last Sunday, the Express-News ran an article in the Real Estate section extolling the virtues of reverse mortgages. I am 78 and my wife is 75. We have three grown children. Our house is worth about $200,000 and has no loan against it. We wouldn’t mind some extra cash, but just can’t believe that reverse mortgages are as good as they sound. How would a reverse mortgage affect us financially? W.F.

Some reverse mortgage loans give you a monthly check, and some pay you a lump sum up front. You might use the money to pay other debts or for your other needs. The catch is, of course, that the loan must be repaid.

As the Sunday Express-News article said, reverse mortgages don’t come due until the borrower dies, sells the house or permanently moves out. The law actually requires you to pay back the loan if you stop living in the home for 12 months without permission from the lender, to pay it if you default on your taxes or insurance premiums, or to pay it if you cannot maintain the home to the lender’s satisfaction.

When the loan comes due, the reverse mortgage must be repaid with interest. Since no payments were made during the life of the loan, interest built up while you were enjoying the loan principal. That means that a reverse mortgage can be extremely expensive.

Here is an example tailored to you at ages 75 and 78. The following figures are from one of the large national banks that make reverse mortgages; a different lender may have fees that are higher or are lower. The maximum loan available to you would be $142,400 on your $200,000 home. Although you would be borrowing $142,400 you would only put $126,644 into your pockets because of $4,000 lending fees, $4,000 mortgage insurance, $3,053 closing costs and $4,703 for the bank’s "service fee".

The current interest rate charged by that bank is 5.66% for a lump sum loan or 5.81% if you draw monthly checks against your loan. The rate is variable with a maximum rate of 15.66%.

Assume the current 5.66% rate will be constant and that your wife will outlive you eventually passing at age 84. If that actually happened, the loan balance due would be about $224,000.

We cannot predict what will happen to the value of your home between today and the day you die, but if home values rise at only 2% per year the house will be worth about $240,000. Thus, your heirs will receive the excess equity of $16,000 after paying off the loan. You got $126,644 and your heirs got $16,000. The bank received $97,356 in fees and interest, which is the actual cost of the loan to you. That is expensive.

A reverse mortgage should only be used when there is no better choice. Different borrowers may be motivated by various concerns – but a reverse mortgage is not, in my opinion, a viable tool to be used for estate planning purposes, or one that has value when setting up a trust, or a meaningful way to reduce estate taxes.

Before you take a reverse mortgage, carefully evaluate the impact of selling your home. If you sold that $200,000 home and purchased a replacement for $100,000 (downsizing in the move), you would pocket about $85,000 after fees and closing costs. If you put that money in the bank at 5%, you will earn $350 interest each month. You are receiving interest from a bank instead of paying interest to a bank. When you die, your heirs get that house and whatever money is left, which is far more than they would get after paying back the reverse mortgage.