Seniors try to get ahead by going in reverse

Financial counselors caution that reverse mortgages (currently offered nationally by three lenders: the Federal Housing Administration, Fannie Mae, and Financial Freedom Senior Funding Corp.) are not for seniors who aren't sure how long they are going to be in their home.

"If it's only for two years, it's not the best thing to do," says Ric Edelman, president of Edelman Financial Services in Fairfax, Va. "The high closing costs and presumed interest rates make these type of mortgages not ideal."

Closing costs, which include fees paid into a government-run insurance fund, title insurance, appraisal, bank, and recording fees, can easily add up to $10,000 for a $200,000 loan limit, regardless of how long you keep the loan or how much you borrow.

"If you don't hold the loan for five or 10 years, you're going to pay a lot of money for it," admits James Mahoney, CEO of Financial Freedom, one of the nation's largest providers of reverse mortgages. "Generally, this is not a loan you would want for the short term."

Reverse mortgages, therefore, may not be the best alternative for younger retirees - people in their 60s.

"The money you get from a reverse mortgage at that age will not necessarily be enough to pay for your expenses once you're in your late 70s or 80s," says David Dondero, a certified financial planner in Alexandria, Va. "Even for someone who could use the extra income to pay for increased health costs or living expenses, I would not advise them to jump into a reverse mortgage as a first alternative."

Instead, Mr. Dondero suggests that it may make more sense to downsize - sell your single-family home, move to a smaller house or apartment, and invest the difference.

If you own a home that has appreciated substantially, you can sell your expensive house and buy something cheaper with lower taxes, he says. You can then invest the difference to generate a stream of income. On a $200,000 nest egg, that could mean $10,000 a year in income if you invest only in municipal bonds and high-quality corporate bonds that pay 5 percent a year in interest.

But for 67-year-old Sylvia Szelag, a bank teller from Taylor, Mich., who closed on her reverse mortgage in October of 2004, selling her home was not an option.

"I need my home," says Ms. Szelag. "I've lived in it for more than 50 years and it's only six miles away from my daughter and grandchildren. Plus, I like my yard and I love my garden."

For Szelag, her reverse mortgage was "a necessity."

Health problems forced her to take medical leave from her job - and her Social Security income left very little money to live on after covering her monthly mortgage payment.

The reverse mortgage "gives me piece of mind," says Szelag. "It relieves all the pressure. I can now live comfortably."

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