Reverse mortgages can help senior homeowners accomplish many different objectives. You can use them to replenish depleted retirement funds, start new businesses, enhance your lifestyle, provide economic security, avoid foreclosure, or even buy a new home. The way you choose to accept your funds depends on your purpose for the proceeds.
When You Need a Lump Sum
Lump-sum distributions may be appropriate for avoiding foreclosure, shoring up retirement funds, purchasing investment property, buying a new home, paying off existing medical bills or other one-time needs. Here's how it works.
- Staving off foreclosure. If you have a lot of home equity, but insufficient income to pay your current mortgage, you may be able to use some of that equity to ease your burden. A reverse mortgage with a lump-sum disbursement can help you pay off your mortgage and allow you to keep your home.
- Increasing retirement savings. In recent years, your retirement investments may have suffered a severe blow as the Dow plunged from its record high of over 14,000 in January 2007 to less than half that by March 2009. If you had to withdraw money when the markets were down, you may not be able to make up any income losses without substantial new deposits into those accounts. If that's the case, you should consider taking at least some of your reverse mortgage proceeds as a lump sum, so you can use the money as an income subsidy or re-invest it if market conditions are favorable for you to do so.
- Purchasing investment property. Since it's your money, there are no restrictions on how you use the proceeds of your Home Equity Conversion Mortgage (HECM). Since you don't need good credit or a healthy income to qualify for a HECM, it may be much easier to get money for purchasing rental property with a reverse mortgage than with an investment property loan. Just make sure that the property is a good enough investment to make it worth incurring the mortgage lenders' fees and interest charges of an HECM.
- Buying a second home. Want a new home with no mortgage and some cash left over? Then consider the HECM for a home purchase. This is a good method to use if you are interested in "snowbirding," where you have a northern home for summer months and a winter condo in a warm, sunny location (or vise versa). If you have sufficient equity, using an HECM can allow you to pay cash for that second home and have no mortgage payments to worry about. If the equity stake in your existing home is deep enough, you can even draw a pool of additional cash out and stash it in a bank account to cover taxes and any maintenance expenses, annual travel expenses, or other practical uses.
When Regular Monthly Disbursements Are Best
Reverse mortgage lump sum payments can affect your eligibility for certain government programs, including Medicaid. Generally, money you get from your HECM isn't counted as income as long it's spent within the same month it's received. If you don't spend it all, however, it could push your asset totals beyond the allowable limits for Medicaid or SSI eligibility. Ask your reverse mortgage counselor or consult with a lawyer who specializes in elder care if you are concerned about eligibility for state or federal benefits. In addition, monthly disbursements are a better idea if you don't plan to spend all of your proceeds at once, because you only accrue interest on what has been disbursed. Your monthly payments can be used to supplement your lifestyle. You can opt to receive them for a set period (term) or for as long as you live in your home (tenure). The shorter the term, the higher the amount.
The Advantages of a Line of Credit
An HECM structured as a line of credit can be used on its own or added to any other payout option -- for example, you could take smaller monthly payments and have the line available in case of emergency. A credit line can also be used to start a new business if you get tired of retirement, to fund college tuition for a relative, or for an annual vacation. The beauty of the line of credit is that you only pay for what you use, and it can even grow over time as your property appreciates.
HECMs Offer Custom Solutions
The way you choose to take your money depends on your needs and financial situation. HUD reverse mortgage counseling, which is required before you take out your HECM, can help you sort them out and choose your best option.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.