So, a potential customer calls me the other day and inquires about the reverse mortgage and how much money he can get out of his house assuming it appraises at a certain amount.
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.
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.
My borrower has these four options:
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 third is taking a line of credit. The line of credit allows the borrower to pull money out of of the line of credit any any time. The benefit of the LOC is that interest is that unused money is not accruing interest against the equity of the home while it is still in the line of credit.
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.
Going back to my lump sum borrower it is pretty clear he is much better off without the lump sum as he doesn’t need all that money, and interest would be eating away at his equity using that choice. He was better off with some for of monthly draw combined with a line of credit.
Different choices exist because we all have unique situations.