From Money.com, June 4,2015
By Donna Rosato
You don’t have to repay the loan as long as you live in the house. Once you do leave it, say when you pass away or move out to assisted living, the house gets sold and the proceeds go toward paying off the loan, as well as any interest or fees that have accrued. Keep in mind that the longer you have the loan, the more you will owe. And depending on the type of loan, the rates may be variable.
If the house sells for more than the loan balance, you or your heirs get the difference. If the house sells for less, you aren’t on the hook; the bank just takes a loss.
Now here’s why it would be hard to come out ahead by investing money from a reverse mortgage. First, reverse mortgages are costly loans to pay back compared with traditional loans. Reverse mortgage rates are currently about 5%, versus about 4% for a typical 30-year fixed rate loan. Closing costs are typically higher too.
You also need to factor in taxes. “If the money is invested in anything that has capital gains or interest income, you’ll owe taxes on that,” says Mingone. So you’ll need to aim for a 7% to 8% return to cover taxes and interest. To find an investment that would give you that kind of return, you’d have to take on more risk.
Still, there are some situations where a reverse mortgage makes sense, especially for retirees who are cash-poor and house rich, Mingone says.
If money is tight, the payments from a reverse mortgage can give you a new stream of income. If you have a mortgage on your current home and it’s hurting your cash flow, you can pay off your conventional loan with a reverse mortgage and eliminate that expense.
It could also be used to pay off high rate credit card debt, fund major home repairs, or cover big medical bills. Check out the AARP Reverse Mortgage Education Project for more information that can help you decide if a reverse mortgage is right for you. If you do go ahead, the federal government requires you to meet with a counselor before taking out the loan. You can find a counselor at the Department of Housing and Urban Development’s web site.
“There are definitely times when using a reverse mortgage is a smart move, but investing the money isn’t one of them,” says Mingone.
This article originally appeared in June 2015 and certain information presented may have changed. For more current information please contact Capital Management Group.
Recent Comments