Which is the Right Way to Cash Out of Reverse Mortgage
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.
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.
My borrower has these four options:
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.
Number 2 is for the borrower to receive a monthly payment. The borrower may determine the amount, which may have an end date when the money runs out, or the bank may set a number which lasts in perpetuity.
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.
Number 4 is to combine our prior 3 plans in some way.
In my borrowers case the line of credit option was his best choice because he didn’t need a large lump sum up front. He only needed some money from time to time. Additionally, by using the line of credit is interest burden would be kept to a minimum.
It’s case by case which you choose to use..
