Some more tips and tomorrow, the final 10.

- Don’t idle your car engine to warm up.  This even includes new turbo models. It warms up best and most safely by driving immediately but without accelerating rapidly. For colder areas like my previous homeland of Winnipeg, use a block heater with timer, cold engines can use up to 50% more fuel for short trips.

- Keep a fuel consumption log to compare your mileage and track compared to what your car is supposed to get.

- If you have to run errands and you live in a hot climate, do them early in the morning or later at night to avoid use of AC.

- When buying a car, avoid the sunroof, they create drag

- Park your car in shady or covered areas. You will need less AC and there will be less evaporation of gas.

- Use a solar car cooling device while parked.

- Instead of driving to some far off store (like a far away mall) order things online.  A trip from Fort collins to Denver might cost me $50 in gas when its all said and done

- Leave for work earlier and come home earlier.  This will help avoid rush hour where you are stop and go wasting gas.

- If you have a long commute, look to bring your work closer to you…or move closer to your work…or see if you can work from home a couple days a week.

- Get your own accurate (digital) pressure gauge. They are cheap and more reliable than those crappy 80s ones.

- Watch out for faulty oxygen sensors, if yours is faulty you can improve your mileage by up to 40%!

- If you have a huge load of things you are carrying for a long distance, try to balance the weight more to the front to avoid lifting the front of the car and increasing air drag

- If you are shopping for a new car, buy a lighter color, it will reduce cooling needs

- If you are not getting a new car but have a dark interior, add lighter colored seat covers

- Buy a motorcycle or scooter and use it during the summer (or year round if you live somewhere warm)

- For short distances, ride your bike, its good exercise and saves gas

- Opt for manual transmission over automatic transmission when car buying

- Dont fill up when the gas truck is pumping fuel into the tanks.  A lot of times any dirt and junk in the tanks will get stirred up and

- The bigger your car, the more you should slow things down. Rolling resistance increases linearly with speed but air resistance increases exponentially with speed. Twice the speed = 4 times the air resistance.

- Get a gas card and save a bunch over time

Buy gasoline during coolest time of day
Early morning or late evening is best. During these times gasoline is densest. Keep in mind - gas pumps measure volumes of gasoline, not densities of fuel concentration. You are charged according to “volume of measurement”.

Buy a fuel efficient car
Ok, obvious

Have the right kind of tires for the right season
Too deep of treads in summer will rob you of some gas milage

Tighten the gas cap
Gas will evaporate from your car’s tank if it can.

Dont top off your tank
The additional gas will probably just seep out.

Clean or buy a new air filter regularly

Take your racks off the top
This will reduce drag.  Not using your ski rack?  Take it off

Carpool
Another obvious one, but perhaps the most effective…and least used

Combine trips
If you have multiple errands to run, do them all at once and figure out the best route.  This will save you a ton of time too.

If gas prices are steady, fill up when you’re almost empty
This will save the weight of the gas, but be careful, don’t wait until exactly empty, there could be crud at the bottom of your tank you dont want getting sucked up and clogger your fuel filter.

So I have a massive list of tips I’ve compiled going from the obvious to the not-quite-so-obvious. So here to start things off, is 1-10.

1) Don’t speed
When you speed not only does your drag increase (thinks back to my mechanical engineering classes that I mostly slept through). Not only that, but at higher RPMs even in high gears you are burning a lot more fuel. If you’re on the highway, slowing down from 85 to 70 depending on your car can decrease your fuel consumption by over 20%. I am terrible about this. Im working on it.

2) Dont accelerate too hard
Once again, high RPMs = large amounts of gas being burned. Im also terrible at this. I am also working on this.

3) De-Junk-ify your car
The more the car weighs the more fuel it uses. Only bring stuff you really need. Like golf clubs.

4) Turn that A/C off (or use less)
When the air conditioner is on it puts extra load on the engine forcing more fuel to be used (by about 20%). Roll down the windows, after all, being in touch with with the cool breeze is nicer anyway, right? Edit: rate of diminishing return, drag gets worse as you speed up so above low speeds, roll the windows up and switch to AC.

5) Long trip? Cruise control it up
Avoid accelerating and decelerating if possible. See #2.

6) Waiting on a Train? How about at Sonic? Turn the car off
Save some otherwise wasted fuel.

7) Keep your tires inflated
My cousin and I just did a test on this on his Lumina and it really does save you several MPG if they are properly inflated…in his case from low to slightly high, 3 MPG, no joke. On my Z thats $.57 per gallon!

Buy the lowest grade (octane) of gasoline that you can (safely)
Check your owner’s manual for this information. IF you’re not pinging, you’re good to go.

9) Pay cash at places that charge extra for credit cards

10) Get gas from places like Walmart and King Soopers that are offering loss leader deals
You can often get gas for a lot cheaper. I am saving about 20 cents a gallon at Kings by my house. Sweet.

Consumerism. Its an odd word. According to wikipedia “Consumerism is the equating of personal happiness with the purchasing of material possessions and consumption.
The term is often associated with criticisms of consumption starting with Karl Marx and Thorstein Veblen.”

Now, don’t get me wrong, I am not fan of Karl Marx, quite the opposite. At best he was a fierce idealist set in flawed theory, at worst…well I won’t go there. But he did have one thing right, but for the wrong reasons. Consumption. The problem with consumption is not consumption in and of itself, it is the effects of consumption.

If you live in the United States of America, one reason you may feel challenged to pull ahead financially is that America’s culture is heavily focused on the consumption of goods and services by individuals and families. While consumption may help grow America’s mammoth $13.1 trillion economy, it can also hurt the long-term wealth of the average American family. Why doesn’t America’s culture focus on more fiscally responsible behavior like saving and investing? Because America’s powerful media and entertainment industry keeps American culture centered on the consumption of products and services by offering and providing advertising and other marketing solutions to America’s best and brightest marketers. It is the combined power of the industry and the marketers that keeps you and your family focused on spending your money on goods and services in the here and now instead of doing what is best for you and your family in the long run – building wealth by saving and investing.

Every day of your life in the United States, companies attempt to attract and hold your attention for just a few seconds so that they can tell you about their product or service, or simply make your mind aware of their brands. Such attempts are known as marketing, the process of moving you closer – mentally and physically – to the purchase of a company’s products and services. Hundreds of thousands of companies throughout the country and from around the world spend hundreds of billions of dollars each year on marketing. Each of these companies is desperate to tell you about the products and services it has ready to sell to you. Unfortunately for them, you are yet another busy American whose attention span is scattered and unfocused as you go about your day dealing with all kinds of personal issues related to living your life. Even worse for them, hundreds of thousands of other companies are also marketing to you, further distracting and dividing your attention. No doubt, a fierce corporate battle rages every single day for a piece of your mind.

To whom do all these companies pay their billions of dollars to get your attention? America’s media and entertainment industry. Companies pay media and entertainment stalwarts such as ABC, AMC, CNN, CBS, Clear Channel, Conde Nast, Discovery, DoubleClick, Dow Jones, ESPN, Forbes, Fox, Gannett, Google, HARPO, Liberty Media, Live Nation, Martha Stewart Living Omnimedia, Miramax, MTV, NASCAR, NBC Universal, The New York Times, Playboy, Six Flags, Time Warner, US News and World Report, Walt Disney, and Yahoo! for access to your attention. The media and entertainment companies control the access to your attention because you demonstrate an interest in what they have to say or show you by reading their magazine, watching their cable channel, seeing their movie, listening to their radio station, watching their TV show, reading their newspaper, or attending their concert or other live event.

Free content: no such thing

In the jargon of the industry, media and entertainment companies design, develop, and distribute “content” that they hope you will value or enjoy. Content can be almost anything: a sitcom like Friends, a local news segment, a medical drama like E.R., a game show like Wheel of Fortune, an article on a current event in Time magazine, an editorial piece in the Wall Street Journal, a pictorial of the Grand Canyon in National Geographic magazine, or whatever. The media and entertainment companies know you value or enjoy their content when you continue to watch it, read it, listen to it, and/or pay for it. The content attracts and holds your attention as long as you continue to value or enjoy it.

While media and entertainment companies produce their content for your interest or entertainment, they do not view you as their customer. Instead, media and entertainment companies view the marketer – the company that seeks to send a commercial message to your brain – as its customer. After all, it is the marketer, not you, who pays the big bucks to the media and entertainment companies. You generally get the benefit of the content for free. Alas, the content is free to you only because the content is a means to an end – access to your scarce time and attention. Such access is what a marketer is paying for when it buys advertising or other marketing solutions that integrate into the media and entertainment company’s content.

Ultimately, the business of the media and entertainment industry is to attract and capture marketing dollars from companies seeking to deliver a marketing message to you, the viewer, reader, or listener of the industry’s content. As you watch, read, or hear the industry’s content, you receive messages making you aware that the marketer’s product or service exists. These messages further encourage you to dig into your pocket, pull out your cash or credit card, and then exchange your money (or, in the case of a credit card, the bank’s money) for the marketer’s product or service. It is in this way that America’s media-drenched culture helps to separate you from your money, hurting you and your family’s ability to build wealth and financial freedom over the long term.

“Better, faster, more attractive, stronger, more manly, more feminine…”

The media and entertainment industry is not evil. The industry is a business just like any other. Chances are you know someone who works in the media and entertainment industry. Employees working in the industry are not evil either. They are just doing their jobs. What makes getting ahead in America so difficult is that, on the whole, the media and entertainment industry’s employees are damn good at their jobs. They know how to attract your attention, hold it, and then deliver a marketing message to your brain that compels you to believe that you need a certain product or service to make you feel more attractive, more confident, more smart, more happy, more safe, more successful, more popular, more relaxed, more productive, or more fulfilled.

Once you believe the product or service will do for you what the marketer says it will do, you are likely to go out and exchange your hard-earned money (or, the money you borrowed from a bank by means of a credit card or installment loan) for the marketer’s product or service. Clearly, the media and entertainment industry and the marketers it serves are very powerful and persuasive forces in America’s culture. Both know how to manipulate us by appealing to our weaknesses and insecurities as human beings. We are all at risk of falling susceptible to their skills and tactics. Nearly every day, many Americans fall for them hook, line, and sinker.

Life Is Always Great in the imaginary world of consumption…

A real problem with living in America is that the media and entertainment industry and the marketers it serves are able to use their collective power of communication and persuasion to set the standard of what is “normal” in the minds of most Americans. Unfortunately, the normal they portray does not represent reality – that day-to-day life experience of most Americans. Instead, the “normal” foisted upon Americans by way of mass media channels such TV, radio, and magazines is only normal in the land of make believe, that faraway imaginary place known as La-La Land.

For example, do you really believe that…

* …the characters on the sitcom Friends can really afford the huge apartments they share in New York City working at the jobs that they do?

* …buying and owning a new Ford truck – “Built Ford Tough.” – will make you more manly and more respected by your friends and family?

* …drinking Bud Light beer will make sexy, young women give you come-hither looks while they strut around you in teeny-weeny bikinis? (damnit!)

If you can honestly answer “Yes!” to any of these questions, check yourself – there is a harsh reality out there for you. Back here in reality, buying and owning a new Ford truck will not make you more manly or more respected by others. Most people will not even notice a) that you drive a truck, b) what brand it is, or c) whatever beguiling effect it may have on you. If they do notice, they probably do not really care. After all, your new Ford truck is just another truck out of millions on American roads today.

…But, Reality Is Where You Build or Destroy Your Wealth

In reality, buying and owning a new Ford truck will simply get you a truck to drive. Unfortunately, it also gives you many negatives:

* a large decline in resale value after you drive the truck off the dealer’s lot

* interest charges and other fees you must pay on the financing you used to buy the truck

* insurance premiums you must pay to cover liabilities and other risks you might incur while you drive the truck

* gasoline or diesel prices you must pay to power the truck’s engine

* maintenance and repair costs you must pay the Ford dealer or a service garage to keep the truck going down the road

So, according to your external influences you get more manly and more respect from others by buying and owning a new Ford truck. In reality, you get a new truck worth less than the price you paid, plus the opportunity to spend thousands of dollars more on interest, insurance, fuel, and maintenance services.

The media pumps you up and makes you feel good emotionally. Reality delivers you the “real deal” and transfers your hard-earned cash (or, the cash you borrowed from banks) into the bank accounts of those who sold you their products or services. Had you not bought and owned the truck in the first place, all the cash you spent on the truck would instead be increasing your wealth as your savings and investments grow over time. When it comes to building wealth for you and your family, you are much better off keeping your head focused on reality than allowing the media and entertainment industry and the marketers it serves to whisk you away to La-La Land where you – and your wallet – are far more vulnerable.

Fight consumption, get ahead in the world

Clearly, the media and entertainment industry and the marketers it serves are powerful, pervasive, and persuasive forces in America’s culture that can have a negative impact on your wealth. The question for you becomes, “How do I protect my wealth from these powerful forces?” The answer is clear: take the voluntary actions needed to prevent these forces from wielding their persuasive powers over you in the first place. After all, the industry and the marketers do not have power over you unless you give them that power. Believe it or not, you are 100% in control. The real challenge is your willingness and ability to control yourself.

Just because the media and entertainment industry exists does not mean that you must heed its siren call of “buy! buy! buy!”. Life in America provides innumerable opportunities to avoid the industry’s strident efforts to numb your critical thinking skills and influence your spending behaviors to the detriment of your long-term wealth. To uncover – or rediscover – these opportunities in America, you can freely choose to opt out of the “normal” American life built, portrayed, and sustained by the media and entertainment industry.

There are many simple ways to exert your control over the media and entertainment industry and the marketers it serves. For example:

* Go for a walk or a hike with your dog

* Spend time sharing personal aspirations and goals with your family

* Share a picnic lunch with your spouse or partner in a beautiful park in your city

* Take a cooking or painting class at a local community college

* Invite several friends over to your home for dinner and lively conversation about matters important to our world
(NOTE: the private – yet so desperately public – lives of Hollywood celebrities do not count as matters important to our world)

* Write and share your personal views on a special interest blog or forum online

* Read a book on how to wisely invest your savings

* Teach yourself a software program to improve your personal productivity

* Exchange long emails with a friend or family member living overseas

In other words, go out into America and do things that do not rely on the media and entertainment industry. Do things that tend to enhance your practical knowledge, your marketable skills, and your personal relationships and experiences. These concerted actions on your part can improve the quality of your life and, as you will soon discover, the lives of others. Where you can improve the lives of others is where you will establish and grow your wealth over time, right here in reality. After all, it is in America, not La-La Land, that you should be looking to get ahead in America.

Bad things happen.  Its one of those things in life that we don’t like to think about but nonetheless is there.  Throughout history, many of us have been adversely affected when somebody or something oppressed, injured, tricked, mistreated, or otherwise afflicted us with emotional hurt, physical pain, or psychological damage. Due to no fault of our own – whether by cruel fate, happenstance, or divine intervention – we involuntarily suffered something unexpected and unfavorable that, by definition, reclassified our human condition to that of “victim”.

How about in your life?

Perhaps you have suffered abuse, theft, violence, or accidental injury at some point in your life. Maybe you were born with a genetic disease or developed an unfortunate illness over time. Perhaps other people treated you poorly because of your gender, race, or ethnicity. Maybe you were born to irresponsible parents who were not there for you as a child or who never quite got their own lives together enough to be a truly positive force in your life. Or, perhaps you were born to really good parents who just never seemed to make enough money to make your growing up as comfortable as it was for many of your friends and fellow classmates.

Certainly, these were bad things that happened to you. Moreover, what happened to you was outside of your own control. You lacked the power to prevent or change these bad things when they happened to you, and you lack the power today to travel back in time and alter your personal history so as to completely avoid these bad things in the first place. Whatever these bad things were that happened to you in your life, they really happened to you, it was not your fault, and there is no changing that.

    So ask yourself was I a victim or am I still a victim?

Your answer to this question is crucial to getting ahead in America because it says a great deal about your approach to life. If you answer, “I am a victim,” you acknowledge that something bad happened to you in your past and you remain a victim of that badness to this very day. If you answer, “I was a victim,” you acknowledge something bad happened to you in your past, but you no longer remain a victim of that badness today.

Note that these two different perspectives offer you two different states of personal freedom. In one perspective, you are not really free – you are still shackled in the chains of victimhood. In the other perspective, you are entirely free – you have transcended victimhood to arrive at a human condition not defined by suffering or other forms of badness. Note that the only difference between these two different states of personal freedom is the verb tense you choose to use – present (“I am”) or past (“I was”).

Which state of personal freedom would you prefer to be in?

Hopefully, you do not revel in victimhood. It would be unhealthy if you have discovered, in some way, benefits to continuing your status as a victim. While you may somehow feel those benefits exist, remember that, in victimhood, you are not truly free. By definition, personal freedom trounces any benefits to victimhood that you may feel.

If you truly want to get ahead in America, in the past is where your victim status needs to be. Victimhood needs to be a human condition that will always be familiar to you because you have been there; at the same time, victimhood needs to be foreign to you today because you consciously realize that personal freedom is what you truly desire in the life you are seeking to create for yourself in America. To be clear: your personal freedom begins the moment you refuse to be a victim.

In honor of Friday, the best day of the week I have something special for you all. I don’t know about you but there is nothing I like better on a friday afternoon than an nice cold beer in summer. I think of it as my sort of blue collar toast to the work week. Of course, I can’t consider myself a blue collar worker since I sit at a computer all day, but at least I can pretend I just got done with a strenuous week of construction. Unfortunately a lot of my favorite beers are privately held companies but some are not. I promised myself I will make within the next few months at least a small investment in things I drink. So here are my top 5 company picks with their beer that I drink the most of:

Anheuser Busch - (NYSE:BUD) - Budweiser beer
Who hasn’t had a Bud? Anheuser Busch sells more of the brand than any other beer in the world. There is a huge plant near Fort Collins (we really are the beer capital of the US imo, or at least close). The commercials with the Clydesdales: its all real. No really, its crazy, they have horses out running around playing football at their plant. Well, maybe they don’t play football, but they are definitely out there runnin around. They pay a decent yield and own some theme parks too.

Grupo Modelo - (Public, MXK:GMODELOC) - Pacifico
What says summer better than Mexican beer, with lime? And ok so they make a lot more than Pacifico but I challenge any of you to find me a better Mexican beer than Pacifico Clara. I have a weekly debate with my buddy who loves Negro Modelo and apparently his taste buds are still maturing. He’ll come around.

Molson Coors Brewing Company - (Public, NYSE:TAP) - Blue Moon
Montreal, Canada-based company which owns the Coors Light, Coors, Coors Non-Alcoholic, Blue Moon Belgian White Ale, Blue Moon, Molson Canadian, Molson Dry, Molson Export and Grolsch brand of beers. I can forgive them for Grolsch simply because of Blue Moon. They brew coors not too far from here in Golden Colorado and we always see these ads with streams and rocky mountains and pete coors standing majestically. Sadly, it does not make Coors taste any better. They still made it this high up because I have to rep my Canadian heritage.

Boston Beer Company - (Public, NYSE:SAM) – Samuel Adams Boston Lager beer
Sam Adams is the best tasting of the mass produced beer imo. Plus it has a sweet ticker “SAM”

InBev NV - (Public, EBR:INB) - Leffe Belgian Ales
The international stock offering, I had to include at least one belgian ale cause boy do I love them. Most of the heavier beers I drink are privately held microbreweries but as I was browsing around I stumbled upon InBev, Hallelujah!

**Bonus For Non-Alcoholic Beverage:

Cadbury plc (ADR) - (Public, NYSE:CBY) - Diet Dr Pepper
Now tastes even more like regular Dr Pepper, and now being consumed en mass by Jesse every day.

Now you too can own some stock and tell yourself every day: “I just made a bit of money off of Jesse.” What more can a reader ask for, right? Happy Friday!

One readers email reads: “Jesse, you post less than half the time anymore. I love Matt but are you forsaking us?” As many of you know by now, I got engaged this month. Well I have some other big news: we are building a new house. Thats also why I haven’t been able to post as much lately.

I hadn’t posted on it yet because there has been a ton of haggling and shinanogans going on to make things work. The short story is that my fiance lives a ways outside of Fort Collins, while I live in the college area of Fort Collins. We are remedying this by compromising: building a house right outside of town in a brand new development area. Its a seven step process:

1) Find plot we like
2) Have BBQ and drink beer
3) Negotiate with builder
4) Have BBQ and drink beer
5) Sell Lauren’s house & rent out Jesse’s house
6) Build house
7) Have BBQ and drink beer

First the plot we liked:

Its hard to see there, but behind us is the mountains with a great view. Ill have to put up another pic sometime. Next we picked our house:

Next the negotiation:

Something to keep in mind when you are negotiating when building a new home particularly in the case of a semi custom home is that the builder probably has pre-arranged incentives that may or may not be flexible. For national builders a lot of times they are not too flexible on what they will do simply because they deal in so many masses that it is not worth it to try and bend to every potential buyer. But here are my tips that we used successfully to get roughly $32,000.00 off in incentives and add ons.

1)  Ask about incentive programs
Many times the builder will have some sort of program where they will take money off of the base price of the house if you use their lender.  The trick here is to make sure that if you do use their lender, make sure to insist that the builder also pay closing costs.  The reason for this is that if they are not paying closing costs you may end up with very high closing costs due to the lender knowing you are “stuck with them.”  If the builder is paying the closing costs (which 90% will agree to according to my credit union) their lender will have a harder time trying to tack extra points onto closing.

2) Ask for more
In our case to upgrade the basement from 740 feet to 1500 feet it was an $8000 upgrade.  The builder wouldn’t budge on this but they did offer an extra couple of grand at the design center (non structural upgrades).

3) Have other options
If you are willing to walk away from the builder, many times they will do extra to get you to come back.  Having real alternatives gives the ability to play one builder against another.

Ill be adding and updating as we go along in the process, things are heating up!

Here they are:

1) Investing is for meeting long-term goals; savings is for meeting short-term goals.

2) Broad diversification, with exposure to all parts of the stock and bond markets, reduces risk.

3) An investor’s most important decision is selecting the mix of assets to be held in a portfolio, not selecting the individual investments themselves.

4) Consistently outperforming the financial markets is extremely difficult.

5) Minimizing costs is vital for long-term investment success.

6) Investors should know how each investment fits into their plans and why they own that particular asset.

7) Risk has many dimensions, and investors should weigh “shortfall risk”-the possibility that a portfolio will fail to meet longer-term financial goals-against “market risk”, or the chance that returns will fluctuate.

Market-timing and performance-chasing are losing strategies.

9) An investor should not expect future long-term returns to be significantly higher or lower than long-term historical returns for various asset classes and subclasses.

They are pretty simple and do a great job of embodying everything we stand for here at TPS.

Warren Buffett makes me sick.  And not for the reason you are probably thinking.  It doesn’t make me sick that he his ridiculously good stock prowess made him one of the top investors and richest men in America.  No, that actually makes me cheer him, its his socialist views and attempts at promoting socialism in the country while having made his fortune off of our system that make him an evil person.   I mean evil in the Ayn Rand speak sort of evil.  I recently heard an interview with him and it was enough to make me sick.  He railed against free markets, our government, and free trade.  Today I am going to focus on what the focus of the interview was: estate tax.

A little background for those not familiar with the estate tax.  When you die, everything you owned at death is tallied up, life insurance proceeds are added, and that sum is called your estate.  Your estate is everything you are leaving behind.  Under current law, if your estate is more than $2 million, the federal government imposes a tax on the amount that exceeds the magic $2 million mark.  The tax rate goes up to nearly half.

The death tax is an opportunistic penalty on those who have been successful and accumulated significant assets.  It disproportionately penalizes small business owners and family farmers who often have most of their net worth tied up in those businesses and no liquidity with which heirs can pay the death tax.  Heirs then get to liquidate their parent’s business to pay the tax.  The irony is that those that support estate taxes also tend to be ones that rail against corporate America.

Arguments for the estate tax go like this: in the words of Mr. Buffett “You don’t get to be a quarterback … because your father was a quarter back 20 years ago.”  In other words, without the estate tax, he thinks families who currently control most of the nation’s resources will continue to do so by birthright rather than merit.

Oh except there is one major problem with that.  Most Americans are self made.  Thats right, (According to a study of Federal Reserve data conducted by NYU professor Edward Wolff)  in the nation’s richest 1%, inherited wealth accounted for only 9% of their net worth in 2001, down from 23% in 1989.  Less than 10% of multimillionaires are from inherited money as of 2007.  How Mr Buffett who has been a genius about investing for his adult life can be so ignorant and/or blatantly ungrateful about the freedom he has enjoyed to become wealthy is beyond me.

For the record, the estate tax will not affect me, but it may affect my children someday.  I am not spending my entire adult life accumulating wealth for the government to redistribute it when I die.  That my friends, is socialism.  We are not (supposed to be) a socialist country.   There are plenty of those to move to if you want to.

Even though things are correcting right now, a lot of people have seen the value of their home double or more over the last eight years, creating an interesting alternative retirement plan for those who did not previously have one.  Great, if you are in that position.  The money train is arriving.  But the most important question for those who are planning not only to live in their house, but to live off of it is, what is the best way to get to my equity?  An interest only home equity is no good, that adds another bill and the interest rate is going to be higher than my rate of return on the money I pull out.  It also doesn’t get rid of any existing mortgage debt.

For some of the more “senior” Americans in this position, the reverse mortgage has become a popular solution to all of these questions.  But what is a reverse mortgage, how does it work, and is it really a good idea?

What is a Reverse Mortgage?

A reverse mortgage is, “a special type of loan used by older Americans to convert the equity in their homes into cash. The money from a reverse mortgage can provide seniors with the financial security they need to fully enjoy their retirement years.”

Just like a traditional mortgage it is a loan against your house, but unlike a traditional mortgage, it is not used to purchase the property, but to extract the equity in either the form of a line of credit or a monthly payout.

How does a Reverse Mortgage Work?

The concept of a reverse mortgage is surprisingly simple.  It is the opposite of a traditional mortgage (forward mortgage).  In a traditional mortgage a loan is issued to the homeowner, generally for the purchase of property, and payments begin immediately, allowing the homeowner to pay the principal down over a period of time.  Assuming we are talking about fully amortizing loans, the homeowner will be able to pay the mortgage off in full at some point in the future, commonly 30 years.

A reverse mortgage also issues a loan to the homeowner, however the homeowner does not make payments on this loan.  Ever.  Instead a first position lien is placed on the property, and the homeowner may receive either a line of credit for some portion of the equity or annuity like payments that will be guaranteed for life.  Interest accrues on the loan and is never paid off.  Rather the balance continues to grow every month.  Upon the death of the homeowner, the mortgage company takes possession of the house unless the heirs make arrangements for repayment of the debt.

What are the benefits to a Reverse Mortgage?

1. If the homeowner is at or near retirement age and continues to struggle to make end meet due to the burden of a mortgage payment, this will relieve them of the monthly payment.  This is a big relief to many retirement age homeowners wanting to retire, but worried about their mortgage payment.
2. This allows the homeowner to use the equity in their house as a retirement fund without having to sell and move.  Many older homeowners have spent the greater part of their lives in their final house.  Many have seen their children grow up there, and have deep roots in the neighborhood.  Selling the house would be a painful option.

What are the drawbacks to a Reverse Mortgage?

1. The interest rate is typically 1.5-2% higher than traditional mortgage rates.  Anyone thinking about using a reverse mortgage should consider comparing the cost and benefits of using a cash out refinance traditional mortgage.
2. The other costs are fairly high.  There is an origination fee which will be the greater of $2000 or 2% of the maximum qualifying amount.  There is typically a mortgage insurance premium equal to 2% of the lesser of the value of the house or the maximum qualifying amount in the first year and 0.5% of the loan balance annual after that.  There are also appraisal fees and a litany of closing costs.
3. The likelihood of keeping the house in the family after the death of the homeowners is unlikely.  However, for anyone considering a reverse mortgage, the likelihood is low under any other option as well.

Is a Reverse Mortgage a good solution?

As an absolute last resort if you are completely desperate.  The high closing costs mean you will lose out on large chunks of equity so you are better off selling and moving into a smaller house or apartment if possible.  There are also various government programs for seniors that want to keep their houses (aside from SS, there are property credits, etc).