Reasons Why Seniors Choose a Reverse Mortgage
1. To pay off existing mortgages and eliminate monthly mortgage payments
2. To provide supplemental payments (many seniors receive up to $500 to $1,000 per month to supplement Social Security and their monthly pensions.)
3. To establish a significant line of credit account, to help pay property taxes and other major expenses such as home owner’s insurance.
4. To buy a home (move to better weather, upsize or downsize) without a regular mortgage and without monthly payments.
5. To use funds to prevent foreclosure.
6. To travel more often.
7. For home repairs and home remodeling.
8. To buy a new car and other big ticket items.
9. For in home health care, prescription costs and other health care.
10. For the security of having money available whenever needed.
11. To allow retirement savings to last longer
12. Using the line of credit to draw from rather than drawing from investments when the market is down.
13. Allowing them to retire earlier or allow them to wait longer to draw Social Security which increases the monthly amount they get.
14. To have the freedom that a little extra money can bring to enjoy the activities and things they enjoy doing.
15. Pay for taxis or Uber to easily get around to appointment and social activities when you no longer drive.
16. Pay off credit cards (and avoid building balances again.)
17. Convert a room or add on to accommodate an aging owner, relative, parent or room for a caregiver. Remodel to provide grab bars, ramps and other improvements to help aging household members.
18. Pay your Medicare Part B and Part D costs.
19. Level your monthly income and avoid selling off investments (allowing them to continue to grow or to avoid selling in a down market).
20. Pay for grandchildren's (or even children's) college or professional education. Or help adult children through family emergencies.
21. Maintain what is now being referred to as a Standby Reverse Mortgage to allow one more choice of where to get funds when investments suffer a loss.
22. Have the funds available to cover short term care or physical therapy after an accident or operation. Also use for long term care.
23. Use instead of Long Term Care Insurance which is flexible to use for any purpose rather that the limitations imposed by LTC Ins.
24. Allows you to retire early and pay for health insurance before Medicare is available at age 65. It may also allow you to delay collecting Social Security until age 70 1/2 which maximizes the monthly amount for those expecting to live into their 80's or longer.
25. Pay for medical and technical improvements that help you live longer, live healthier and/or continue to live in your home alone.
This is a list that is similar to one many websites about reverse mortgages may have, I'm going to list a reason that usually is NOT a good reason.
To invest the money from a reverse mortgage.
The following is my opinion and my reasoning. While there might be occasions when this could make sense, I believe that in most cases it does not.
1. If the money is not invested and left in the line of credit option, the line of credit grows at the same rate the borrower is being charged. If the current interest rate is 5% and the borrower has $200,000 to start with, after a year the balance would be $210,000. In general, interest charged when you borrow is higher than savings or even CD interest. If the borrowing rate rises, so does the rate of growth for the line of credit. I'd be surprised if the line of credit rate was less than the savings, CD or treasury bond rates at any point in time.
2. When you take the money out to invest, you will be charged interest on the money borrowed. If you took $200,000 out of the reverse mortgage to invest, you would be charged $10,000 interest in a year (at 5%) and the balance you owe would be $210,000. At a minimum, in this example, you would need to earn more than 5% risk free to do more than break even.
3. When you consider you are giving up 5% tax free on the growth of the $200,000 line of credit and being charged 5% on the $200,000 balance you borrowed to invest, you would need to be earning over 10% risk free and tax free to break even.
4. I acknowledge that if you sold the home, you would still have the investment. However the initial $200,000 you borrowed plus the compound interest on that amount would be subtracted from the equity (the check from escrow) you could have had when you sold the home.