Letter Re: Reverse Mortgages

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HJL,

If I really needed to get a reverse mortgage, I would swallow hard and do it, but….I wanted to add my bit of information on what I discovered on reverse mortgages. Most of what is said is glossy sales pamphlet type info; there’s not much substance. So I started asking questions and pressing for a straight answer. Reverse mortgages give you money based on a percentage of what they think your house is worth. You can either take the money as a lump sum or take payments. My question to them was how is the interest calculated. The answer is that interest is added based on the whole amount they are willing to give you, starting with day one. So say you have a $200,000 house; they are willing to give you $150,000, at the rate of $500 a month. The interest is then calculated on the full $150,000 from the beginning. So if the interest rate is 5% per year, in the first year they give you $6000 and you rack up an extra $7500 in interest. The banks always win. – J.D.

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