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The Real Estate Retirement Connection

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For many of us, the American Dream starts with home ownership. This is one of the inherent, unspoken promises of life in the so-called New World, that probably should be now called the Middle Aged World.

Regardless of the country’s age, however, many people still believe that home ownership is the way we can secure our personal independence and assert our rights too.

There are two reasons this rings true. The first is, yes, home ownership often means cheaper monthly payments and nicer accommodations than renting provides – and, some years down the road, you will actually own the place, rather than your landlord.

The second reason is tied to the concept of retirement. For Americans, the dream includes quitting work at some point while we are young enough to enjoy life, put our feet up, live a little and visit the children and grandchildren – perhaps even spoil them with treats every once in a while (in between fishing trip, of course).

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Traditionally, the reason this works is that while you are paying off the loan of your house, you can assume, except in rare occasions, that property values are always on the rise. Say you purchased a house for $100,000 and took 30 years to pay it off. With inflation alone pushing prices up approximately 100 percent every 10 years, you now have a home valued at $300,000 that you can sell to finance your retirement. In addition, home values rise faster than most items, so your home is a good hedge against inflation, meaning it is likely worth $325,000 or more over the 30 years you own it.

If you look through infographics about reverse mortgages, you will find there is another option that allows you to stay in the home and realize its value for retirement at the same time.

When take out a mortgage on a home – and most other loans, as well – you pay it back in monthly installment that are applied to both the principle loan – the $100,00 you borrowed – and the interest on the loan, which is how lenders earn their profit.

But the first payments are applied largely to the interest, because the banks want their profits up front. They don’t want you to pay off the principle and stop making payments – which means you own the house and have cheated the lender of their profits. So, most of the early payments are applied to their profits (interest), while years later, that ratio flips and most of the payment goes towards paying down principle.

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Using easy numbers to make the point, for a 20-year loan, you might own 15 percent of the home after 10 years – not the 50 percent you would expect. But your ownership portion starts to accelerate quickly as the interest is mostly paid off by that point.

But let’s say you are close to retirement and those fishing trips and visits to grandchildren are getting closer every day, but you still owe money on your mortgage. By now – for example purposes – you own 90 percent of the home, while the lender still owns 10 percent. You don’t want to move, because you are still happy and living a quality life in the home you love. Why should you have to sell the house to get your hands on the money that owning 90 percent of a home represents?

Well, you don’t. What you own as a portion of that home is called equity and you can borrow against that equity. The lender can write a “reverse mortgage” that allows for you to make repairs on your home or just meet expenses while you remain living there.

Yes, with a reverse loan, your equity shrinks. You’ve built up your equity all those years and now it goes the other way. But that’s why you built up that equity in the first place. This is just one way to access that equity – and one that allows you to stay in the home at the same time.

According to Reverse Mortgages.com, there are four standard ways to receive income by using the equity in your home. The first is a lump sum – which is a loan some choose to make home repairs, while others choose it to meet a certain expense, like taxes. Still others might use a lump-sum payment to buy a motor home or a yacht that they always wanted for retirement.

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A second style of reverse mortgage disbursement is opening a line of credit. This gives the homeowner a ceiling to what they can borrow, but they only borrow as they need the funds.

Another popular choice is monthly payments. The borrow decides how much per month he or she wants to receive and is paid every month, accordingly.

Lastly, borrowers can choose a combination of the above.

The idea is simple. You are about to retire, but you don’t want to move away from your home just yet and you are worried about expenses. You have equity in your home that represents a lot of money and you want to start using that money before you sell your home. A reverse mortgage is the finance industry’s response to that situation – and about 50,000 reverse mortgages are written ever year – a popular, safe option for retirement financing.

 

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