Which is the Right Way to Cash Out of Reverse Mortgage
A senior gentleman called me last Friday. He wanted to discuss reverse mortgage options, in particular he wanted to know a dollar figure we might loan on his home given it’s current value.
I pulled out my supercomputer, punched in the numbers and out popped about $130,000. He said, “let’s do it”. So, what he wants to do with the money is take all $130,000 and put into his bank account. He’d make draws thereafter for living expenses.
The first thing I did was to, in no uncertain terms, tell him he shouldn’t do that. How he uses the reverse mortgage is based upon his needs. His needs are basic. He only wants extra money to add to his current income.
He owns his home outright. All he wants is some supplemental income.
For reverse mortgages borrowers have four ways to draw upon the money alots them. My guy on the phone chose the one most likely to hurt his financial situation.
The 4 options are as follows:
The first is simply to do as he wants and take a large lump sum. The lender will set a maximum cash out amount. The borrower can take this amount or a portion thereof out at any time.
Number 2 is for the borrower to receive a monthly payment. The borrower may determine the amount, which may have an end date when the money runs out, or the bank may set a number which lasts in perpetuity.
A popular option is to use a reverse mortgage line of credit. In this instance the mortgage company alots a loan amount. The borrower simply leaves the alotment in the line of credit until it’s needed. The benefit is no interest accues against the home while the money is in the LOC.
An important point about the line of credit is the unused portion of the line is actually accruing interest for the borrower increasing the line of credit over time.
The last option is a combination of the forementioned options.
In my borrowers case the line of credit option was his best choice because he didn’t need a large lump sum up front. He only needed some money from time to time. Additionally, by using the line of credit is interest burden would be kept to a minimum.
Different choices exist because we all have unique situations.
Tags: Mortgage, Real estate, reverse mortgage, home mortgage for the elderly