TV commercials label reverse mortgages simple fixes for elderly homeowners needing cash – a financial easy button.
Sorry, there is no such thing.
Yes, reverse mortgages can be attractive. Folks older than 62 can unlock cash from their home without selling. They can simply draw monthly income, a line of credit or lump sum from their home equity, with no repayment until the home is no longer their primary residence. Staying current requires covering property taxes, homeowners insurance and maintenance.
But be careful. Read the fine print. This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest.
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Elderly retirees need their finances to be simple, clear and available until they die. Reverse mortgages’ ballooning costs can cut against those basic needs.
Reverse mortgage calculators show interest’s huge impact. Pretend you did one borrowing $2,000 per month for 10 years – $240,000 in total. At a 4.5% interest rate, your total due after 10 years would $303,530 – before fees. That’s $63,530 in interest alone. Bump it to 20 years of payments and your final bill is $779,160 – $480,000 in principal plus $299,160 in interest. Thirty years? You owe $1,524,468. Less than half of that, $720,000, is your principal. The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s.
These loan amounts aren’t realistic for everyone. They’re illustrative, showing the key risk: underestimating your life expectancy, living far longer than you anticipate, and ending up aged and broke, unable to meet late-life health expenses. If you’re in great health with a good family history, you could live into your 90s or beyond. Planning for a longer life is key to not exhausting your money.
Reverse mortgages often do the opposite, with perverse incentives. The longer you live, the bigger the lender wins, while your compounding interest burden balloons. Do you really want to be cash-strapped and in debt while trying to fund assisted living or other late-life care?
Some disagree, arguing reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can. This view rightly considers folks’ assets in totality, rather than in buckets, avoiding a common error.
But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise.
Beware products charging big fees for something you can do easily with cheaper, more simple investments. If you’re younger, save now and invest in your 401(k), reaping compound growth’s rewards rather than having them work against you. Stay invested throughout retirement without excessive binge-type withdrawals, and you should readily cover normal late-life expenses.
More security, less debt. Wouldn’t you rather have that control?
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.