When Does a Reverse Mortgage Make Sense?

by Andy Hough on July 10, 2009

Reverse mortgages have recently come into the spotlight as a band aid for seniors with cash flow problems. Unfortunately, the media attention has been generally negative, focusing on a small set of shady brokers that give the entire niche a bad name.

Despite working in the mortgage industry, I’ll be the first to tell you that reverse mortgages are NOT smart for every situation because of the high up front cost. However, if you qualify and need to tighten your financial belt a bit, a reverse mortgage could make sense. Here’s a few situations where a reverse mortgage could be a sound financial decision.

If you’re retired and don’t have any cash left over at the end of the month. Some seniors are still paying a mortgage payment every month and don’t have much left after living expenses. With a reverse mortgage, individuals in this situation could completely get rid of that monthly mortgage payment. Most likely that would amount to freeing up over $1,000 every month.

If your home is paid off but your investment or pension income isn’t paying the bills. In the same vein as the first situation, it might make sense to pursue a reverse mortgage when a homeowner has a large chunk of equity in the home and their monthly income is insufficient. Equity can be cashed out up front or as a monthly payment like an annuity.

If you have high interest debt on your home or some other asset. This is a less common use for reverse mortgage proceeds but in some cases it makes sense. Say for instance, you have a home equity line of credit at 8% or more. That amount could potentially be refinanced at a lower rate or just paid off in full with a reverse mortgage.

Like any loan program, every situation warrants a individual assessment from an experienced professional. If you think a reverse mortgage might make sense, I encourage you to check out our article on the pros and cons of a reverse mortgage and check out our other resources.

Brandon Laughridge is the editor of the Mortgage Loan Place Blog and specializes in educating consumers on the merits of FHA, VA, and Reverse Mortgage programs. To learn more, please check out the MLP blog or follow Brandon on Twitter.

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