How NOT to Use Reverse Mortgage Money

Reverse mortgages are unique types of loans that are based specifically on the borrower’s eligibility.  To be eligible for a reverse mortgage, the homeowner must:

•    Be at least 62 years of age
•    Own the property outright or have a low enough mortgage balance that the mortgage can be paid in full at closing using proceeds from the reverse mortgage loan
•    Use the property as a full-time, permanent residence
•    Receive third-party financial counseling from a Department of Housing and Urban  Development-approved counseling agency
Reverse mortgages include no income or medical requirements, such as credit checks, income verification, or physicals.  Many seniors qualify for reverse equity mortgages; however, what if you are a senior homeowner who qualifies for a reverse equity mortgage, but doesn’t necessarily need one?

The following example serves as a guideline for senior homeowners who are contemplating a reverse mortgage loan for reasons other than home improvement, paying off their remaining mortgage, or helping with day-to-day expenses.

QUESTION: My idea is to take out a reverse home mortgage now, deposit 25 percent in a liquid account to draw on if needed and invest 75 percent in an insured account with high interest.  Is this a good plan?
ANSWER:  No.  If you don’t need the reverse home mortgage money yet, there is no reason to obtain one now and start accruing interest on money you really don’t need.  However, this might be a good time to shop around among reverse mortgage lenders to compare the FHA, Fannie Mae, and Financial Freedom Plans.

If you want to arrange a reverse mortgage now, the popular credit line alternative might be the best option.  The credit line makes funds available when you need them in the future, such as for a new roof or a trip around the world.  While interest doesn’t accrue until you start using the money, not using the available money is an expensive choice because the upfront loan fees and other costs begin accruing interest whether you use any funds or not.