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You’ve probably seen the commercials: Trusted household names promising an easy way to make your retirement dreams come true. There’s no risk. No obligation. Simply a lifetime of income that enables you to live happily ever after on the bank’s dime. End of story, right?
If you’re considering a reverse mortgage, it’s time to explore the rest of the story.
Mortgaging Your Future
A recent report by the Research Institute for Housing America found that older Americans have an average of $184,000 in home equity. If you’re entering your golden years with a paid-off home and little to nothing in your retirement account, a reverse mortgage might seem like the perfect way to ease your financial fears.
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With a reverse mortgage, you convert your home equity into cash. Instead of paying a monthly mortgage payment, you receive money from the bank in the form of a lump sum, a line of credit, or a monthly draw. Why not take advantage of the equity you’ve worked so hard to build?
The reason is simple: You’re throwing a lifetime of blood, sweat and tears down the drain. A reverse mortgage isn’t straight-up cash with no strings attached. It’s a loan that’s loaded with interest and fees. Suddenly, your biggest—perhaps even only—financial asset is a stinking pile of debt.
Reverse mortgage lenders lead you to believe you’ll never have to repay the debt, especially if you plan to live in your home for the rest of your life. But life doesn’t always go as planned. What if your health declines, requiring you to move to a nursing home? A year later, your loan is due, and the income stops. You’ll have to sell your home to pay off the reverse mortgage, leaving you with nothing. Suddenly, you’re faced with large healthcare bills with no way to pay them. That’s probably not the retirement lifestyle you were dreaming of.
Money Doesn’t Come for Free
Reverse mortgages don’t just sink you deeper into debt—they’re also just plain expensive. On top of ridiculous interest rates, you’re going to pay out the nose in fees, including:
—An origination fee
—Standard closing costs
—Mortgage insurance premiums for coverage to protect the bank in case your home doesn’t sell for enough to pay the loan
—A monthly mortgage insurance servicing fee
—Fees for mandatory credit counseling, which you pay whether or not you get the reverse mortgage
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According to a report by AARP, a 75-year-old living in a $250,000 home would qualify for $135,484 at 7% interest. If she borrows half of that amount as a lump sum, doesn’t owe anything on her home, and lives there for another 12 years, the costs add up:
Total Amount Borrowed: $67,742
Up-Front Loan Costs: $12,000
Total Monthly Mortgage Insurance Premiums: $7,933
Total Monthly Servicing Fees: $5,040
Total Monthly Interest Charges: $111,056
Total Loan Costs: $136,029
Total Amount Owed: $203,771
When it’s all said and done, the homeowner owes more than triple the money she took home—and she borrowed just a little over a quarter of her home’s value! If she had just sold her home to begin with, she could have had $250,000 for free!
Want a Brighter Future? Less Is More
After a lifetime of building wealth to retire, why take such a huge step back? If all your money is tied up in your home, the best thing you can do is bite the emotional bullet and sell it. Yes, you’ve made a lot of treasured memories there, but memories don’t pay the bills. It’s time to leave the past behind and take ownership of your future.
Use some of your hard-earned equity to pay cash for a smaller home and bank the rest. Or bank it all and rent a smaller place if you want full financial flexibility. You’ll not only be able to save more now, but you’ll also have the added security of living debt-free once you retire.
It’s also a good idea to talk to a trustworthy financial advisor—one who won’t recommend debt as a way to build wealth. A real investing pro will take time to explain all of your options in terms you can understand so you choose the plan that’s right for you.
Looking for an advisor you can trust to guide you toward a hopeful tomorrow? We can put you in touch with one Dave recommends in your area.