I found a good response to a common question that I get from people considering a reverse mortgage. There are many instances where a reverse mortgage would be beneficial and then there are some less-than-wise uses, too. Applying a bit of common sense is necessary to determine if your intended use is a good choice or not.
Below is some sound advice given in a Q & A format as well as a short video decribing the pros and cons of reverse mortgages. Read on…
Q: Dear Rick: My wife and I are in our mid-70s and we’re having some financial issues. After reading your column, I decided to talk to someone about a reverse mortgage. Based upon my home, I can withdraw $120,000. Currently, I owe approximately $85,000 on my home. I have about $30,000 in charge card debt, which is at 18.5 percent. In addition, I owe about $35,000 in medical bills. I am paying 6 percent on that debt. What I am planning to do with the money is to first pay off my home and then the medical bills. I figure once those are paid off, I could then make extra payments on my charge cards. Do you think it is smart for me to use a reverse mortgage (I plan on being in my home forever)? Do you agree with my distribution of the money?
A: I do agree that a reverse mortgage is the right tool for you to use. It will immediately increase your cash flow because you will no longer have a house payment and you’ll reduce your other outstanding debt. I believe you’re using the reverse mortgage exactly as it was meant to be used. The only thing I disagree with you about is the distribution.
After you have pay off your mortgage, the next step should be to pay off your charge cards. My reasoning is that your charge card interest rate is 18.5 percent, while your medical interest rate is only 6 percent. To me, it is just a matter of good economics. Pay off your highest interest rate debt first. Then, with the cash flow savings from having no mortgage or charge card payment, you could use that to accelerate the debt on the medical bills. To me, this would be the most prudent use of the money.
For seniors, reverse mortgages can be a very valuable investment tool if used in the right situations. I’m not a fan of using reverse mortgages for things such as vacations or investing. I have seen some people get a reverse mortgage, then turn around and invest the money in something like an annuity. Although in many situations an annuity is a good investment product, I don’t think it makes sense to buy one with the proceeds from a reverse mortgage. After all, the interest rate on a reverse mortgage is higher than the interest rate that you’re currently getting on the annuity. Therefore, from a purely financial standpoint, it doesn’t make sense. A better strategy, as opposed to buying an annuity, would be to get a reverse mortgage and use it as a line of credit. In other words, you can get a reverse mortgage and you don’t have to take a lump sum; rather, you can have a line of credit to draw upon on an as-needed basis. To me, this would be a better strategy than using the proceeds to buy an annuity.
For seniors who are having some financial difficulty, a reverse mortgage is a great tool. Not only does it allow you to increase your cash flow by using the equity in your home, but it also provides some protection for you. Under the terms of a reverse mortgage, you can stay in your home for as long as you choose and you do not have to make any payments on the reverse mortgage. Payments are only due if you sell the house during your lifetime or upon your death.
Upon your death, your beneficiaries will have a couple of different options. They can choose to keep the home and pay off the reverse mortgage. They can sell the home and use the proceeds to pay off the reverse mortgage or, if the mortgage amount is more than the house is worth, they can just turn the house over to the mortgage company without any ongoing liability. Therefore, it gives the beneficiaries the options to make the best decision for them based upon the facts at the time. Read more…
There are certainly times when a reverse mortgage can be especially helpful to seniors. To get the most current information regarding reverse mortgages and to determine if it’s right for you, contact one of our specialists today for a free consultation. SLS Mortgage (540) 216-0665