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Column: The Reverse Mortgage Paradox Traps Homeowners

While various news articles continue to tout how reverse mortgages can help struggling Americans through their retirement years, a recent ABC News column expresses a more cautious attitude, noting that “reverse mortgages may back you into a corner.”

TV commercials and celebrity spokesmen — including former Sen. Fred Thompson, of American Advisors Group’s longstanding reverse mortgage advertising campaigns —  gloss over the downside of homeowners drawing the equity out of their homes without any monthly payments, suggests certified financial planner Byron L. Studdard in his column.

Ads for reverse mortgages have become more commonplace, since the market meltdown of 2008-2009 sliced into the retirement resources of millions of Americans. In fact, 26% of 50- to 64-year-olds have not saved any money for retirement, and the same applies to 14% of people 65 and older.

So some homeowners see reverse mortgages as a way to solve their cash problems and also stay in their homes.

“Yet, compared with other types of loans that use homes as collateral, some reverse mortgages can be costly because of interest rates charged and various up-front fees,” Studdard writes.

Considering the costs of upkeep for a home, moving is often a good idea, he says. Why pay to heat and air-condition empty bedrooms? Taxes and maintenance also take a toll on retirement income. Many people don’t consider these downsides of staying because they’re so sentimentally attached to their homes that they can’t think objectively about the costs of staying there.

“The fundamental paradox of the reverse mortgage market is that because people won’t sell the homes they largely or wholly own, they need a reverse mortgage to stay in them, and then they’re trapped financially and otherwise; they can’t afford to pay, so they must stay,” Studdard writes. “If you own your home, selling it and getting an apartment or a small condo can free you from routine upkeep that can grow more burdensome as you age and free up cash needed to pay retirement expenses.”

To read the full column, click here.

Written by Emily Study