Many people ask me the question, are retirement mortgages expensive? So I typically reply with asking, compared to what?
So let me explain…You see, retirement mortgages have upfront fees associated with getting the loan put into place. However, in most cases, these fees can be rolled into the retirement mortgage making it such that the borrower does not have to pay any cash out of pocket to get a retirement mortgage. With that in mind, if a homeowner rolls the costs into the new retirement mortgage and they never make a mortgage payment ever again for as long as they live in the home and they live in the home for the rest of their life…they in fact never paid a penny to get the retirement mortgage. So in this case, I would say the retirement mortgage is the cheapest loan you could actually get.
Yes one could argue that they are using some of their equity so it costs them that. That is true but if one plans to live in their home for the rest of their life, the equity is illiquid otherwise and unusable. So upon the homeowner passing away and the heirs inheriting the home, upon the sale, the heirs will receive less equity. But, it does not cost the homeowner anything in this case.
Furthermore, some people tell me that the closing costs are higher and a regular 30 year mortgage is cheaper. It is true, the fees are higher with a retirement mortgage. But let’s consider this… if you have a $300K mortgage at 3.5%, you are paying around $10,500 in interest per year. Again, with a regular mortgage (30 year fixed rate), you MUST pay your lender every single month both principal and interest. I would say that the principal is reducing how much you owe and going toward your equity. However, the interest is a cost right? So again, if you are paying $10,500 in interest per year, that mortgage is costing you around $105,000 over a 10 year period…and around $315,000 in interest over 30 years. Do you think the 30 year fixed rate mortgage at 3.5% is still cheaper?
So, if you can get a retirement mortgage and not pay any money out of pocket to get the loan and you do not need to make any payments back to the lender for as long as you live in the home (you are still required to pay the property taxes and home insurance and home maintenance), I will again posit that a retirement mortgage is the cheapest loan you could get!