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Spending Your Equity

No doubt you already know one way you want to use the money you would get from a reverse mortgage. But like lottery winners who go broke after wild spending sprees, spending your loan money wisely is important — particularly if your home is your largest remaining financial asset.

Investing

Investing any money you get from a reverse mortgage is not wise. It is extremely unlikely that you can safely earn more from an investment than the loan would cost. Investing loan proceeds conservatively is almost certain to be a money-losing proposition. On the other hand, the investments with the greatest potential earnings are also the ones with the greatest risk of loss.

And remember, the amount of money you can get from a HECM creditline keeps growing larger every month until you withdraw all that remains. The rate at which your remaining creditline funds grow is highly likely to be greater than any safe investment rate you could earn. So you would come out ahead by letting creditline funds grow rather than withdrawing and investing them.

Careful Spending

Be cautious when anyone who wants to sell you something suggests a reverse mortgage as a way to pay for it. Be especially wary if:
  • you do not fully understand what they are selling; or
  • you are not certain that you need what they are selling.

Remember that the total cost to you equals the cost of what they are selling plus the cost of the reverse mortgage. If you need what they are selling, be sure to shop around before buying. You don't have to buy goods or services from the person who suggested you borrow against your home to pay for them. In fact, that's the person to be careful about.

Buying an Annuity

Buying an annuity from an insurance agent with your reverse mortgage money is very risky, and generally not wise. Consider these facts carefully:
  • Most annuities do not provide fixed monthly cash advances. The financial return on these "variable" annuities is tied to the stock market or other investments.
  • Variable annuities can be very expensive, including hefty annual fees and “surrender” charges in addition to the costs of any investments purchased with your annuity funds.
  • Many annuities being sold to reverse mortgage borrowers do not even begin to provide monthly cash advances until many years after you buy them – some are “deferred” for so long that you may not live long enough to get any cash benefits.
  • The cost of a reverse mortgage plus an annuity is generally much greater than the cost of a reverse mortgage alone.
  • If you buy an annuity with a reverse mortgage, you will have a big debt immediately, and that will cost you more in interest charges than you would pay on monthly loan advances from a reverse mortgage.
  • With an annuity you are locked into fixed monthly advances for life, but with monthly HECM advances, for example, if your needs change, you can take a lump sum or switch to a creditline at any time.
  • Annuity advances are counted as income by SSI and Medicaid, so they reduce SSI cash benefits dollar-for-dollar and might make you ineligible for Medicaid.
  • Annuities are less secure than HECMs, and some annuity providers have gone broke.
  • Cash advances from annuities are partially taxable. 

Refinancing

After you get a reverse mortgage, sometime in the future you may be able to increase the loan funds available to you by refinancing the loan. Large increases in your home's value, increases in HUD's home value limit (currently $625,500), or lower interest rates could make this possible.

When you refinance a HECM, lenders are required to show you the total cost of refinancing, and compare it to the increase in available loan funds that a refinance would provide.

This comparison makes it easy for you to see the total costs that would added to the amount you owe versus the additional loan funds that would become available to you. If you need help understanding the comparison, HECM counselors can explain it to you.

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