Using Reverse Mortgage Cash Out Options Wisely
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.
All my prospective borrower wants is some monthly 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 1st option is to receive a lump sum. This the option my borrower was looking for, so he thought. A borrower may draw out any denomination less than that which the lender is willing to lend that particular borrower.
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.
Something to note about the line is it actually accrues interest and grows for the borrower's benefit, while money is in the line of credit.
Number 4 is to combine our prior 3 plans in some way.
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.
Different choices exist because we all have unique situations.
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.
All my prospective borrower wants is some monthly 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 1st option is to receive a lump sum. This the option my borrower was looking for, so he thought. A borrower may draw out any denomination less than that which the lender is willing to lend that particular borrower.
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.
Something to note about the line is it actually accrues interest and grows for the borrower's benefit, while money is in the line of credit.
Number 4 is to combine our prior 3 plans in some way.
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.
Different choices exist because we all have unique situations.
posted by Credit Counseling at
12:39 AM
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