If You Need Cash in Retirement, Sell Your Home and Downgrade. Skip the Reverse Mortgage.


The pitch for reverse mortgages goes like this: “Need a little extra cash for daily expenses, travel, and prescriptions? Use the equity in your home. Call today to see how much cash you qualify for!”

A reverse mortgage is when a company pays the homeowner, who typically has a paid for home, a cash payment each month in exchange for increasing ownership in the home. The amount of the payment and the number of payments depends upon how much of the equity the company is willing to buy from the homeowner. When the homeowner dies or wants to move, the home would be sold with the reverse mortgage company receiving whatever equity they have purchased plus fees and interest.

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The trouble with reverse mortgages is that the fees are outrageous. It is odd that what would seem like a very safe investment, because the homeowner has large amounts of equity so the lender is well shielded against default, would charge such high fees. The only reason I can see for the high fees is that the lenders are taking advantage of old people.

The best solution for having cash and income when one is retired is to save all of one’s life, building up assets, and then have stock and bond investments from which one receives an income. For those in their twenties to forties reading this, take this to heart before going out and buying a bunch of depreciating toys. If one has failed to do this and is in retirement, at least do not give up the amount you have saved in your home to a lender with outrageous fees.

Instead of taking out a reverse mortgage, there are many other ways of using one’s home to gain income. One way is to simply sell a large home and pay cash for a smaller home or rent a townhouse or condo, putting the rest of the money in a CD or investment account. Another method is to rent out a room in the house to a tenant. Another possibility si to rent the whole house for periods of the year, for example if one has a summer home, the house could be rented out for the months of the year during which the home is unoccupied. An ideal situation would be if one lived in a college town in a cold climate is to rent the place to a visiting professor during the school year while one is in warmer climates.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

2 comments

  1. Your objections to reverse mortgages are common and factually errant. The fees are not outrageous, I just closed one where the closing costs were $2600. The other problem is the general terms you use. “Sell the large home and pay cash for a smaller one.” Can you give me the numbers on how well that works? Let’s say the seniors owns a home worth $450,000 and is 65. Give me the details on how well it works to sell and buy and the monthly income it brings, I am sure you have examples since you so confidently tell people to run away.

    • OK, let’s use the rates from the All Reverse Mortgage Company: http://www.allrmc.com/reverse-mortgage-rates.php. They advertise a reverse mortgage with a 5.58% APR, which includes closing costs and insurance. Let’s say our 65 year old home owner takes out a $260,000 reverse mortgage on his paid-for $450,000 home, lives for 10 years, and then dies. Assuming he can invest the payout and spend 4% each year without losing principle, he would get a $10,400 yearly income during the next 10 years while maintaining his $260,000 account balance. His assets and income would then be:

      Income: $10,400*10 = $104,000
      Remaining cash from lump sum: $260,000
      Remaining home equity: $3,000 ($260,000 loan at 5.44% compounded monthly for 10 years is about $447,000, leaving $3000 in equity)
      Total assets and income: $367,000

      Let’s now say the same senior sold his home and bought a condo for $150,000 and invested the remaining $300,000 in equity he frees. Drawing 4% each year from the $300,000 he pulled out of the house. This would be an income of $12,000 per year. He also dies after 10 years.

      Remaining cash: $300,000
      Income: $12,000*10 = $120,000
      Remaining home equity : $150,000
      Total assets and income: $570,000

      So, the reverse mortgage costs you about $570,000-$367,000 = $203,000, almost a quarter million dollars over 10 years. Did I say run?

      Note the lender gets about $187,000 in interest over that 10 years with very little risk since there is so much equity remaining in the home.

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