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 tell him and he’s ready to go. Now his plan is take the entire amount, I believe about $134,000, put it in the bank and live off of it while its gaining interest with his bank.

Well, I had to slow him down a little here and let him know he was making a mistake. He is not an unusual reverse mortgage customer. He simply needs to supplement income for living expenses.

He owns his home outright. All he wants is some supplemental income.

He has four different cash out options to receive money from his reverse mortgage. The one he wanted was probably the worst option for his particular situation.

The 4 options are as follows:

Number one is for the mortgage company to deposit a large glut of money right into the borrower’s bank account. The borrower can use this lump sum option to pull out any amount at or less than the mortgage companie’s alottment.

The second option is to take a set monthy draw. In this case the lender sends the borrower a set amount every month. This can be done for a life long period or a period determined by the monthly draw.

The 3rd choice is to opt for a line of credit. In this circumstance the lender allows the borrower to pull money out on an as needed basis. Unused money does not accrue interest against the home’s value. For this reason this third option is a very popular choice.

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 fourth option is to use a combination of any of the three plans just mentioned.

If we look more closely at my prospective borrower we can see that his best choice was a simple line of credit or a monthly stipend rather than the lump sum draw. He didn’t need it, so why take that money out only to have all that extra interest accrue against the home’s equity.

It’s case by case which you choose to use..

Tagged with: Credit • home mortgage • home mortgage for the elderly • Money • reverse mortgage • senior issues

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