Reverse Mortgage- Another Option

March 2, 2007 at 03:35:54 PM
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I want to first say that I am not that educated on the reverse mortgage. From what I have heard, they are a case by case situation. I am writing this scenario with what I have seen as the basis.
We just refinanced an older couple out of their reverse mortgage, because they weren't really thrilled, after getting into it, with the features and functions of it. My understanding of a Reverse Mortgage, is that you use your equity to pay your an "income" every month. I don't really want to get into the details, that isn't the point of this post. What get's to me is that the client paid crazy fees to get into the new mortgage, but also paid rather high fees to get out in the form of a prepayment penalty. Not to mention the interest rates were pretty high compared to conventional financing. If the basic reason to get into a reverse mortgage is to create income for yourself, maybe there is another option..
Let's say that a couple owes $100,000 on a $500,000 house. Sounds like a good situation doesn't it. They are heading into retirement but haven't really planned well enough to ensure that they are going to have enough money to retire comfortably. They are equity strong but cash weak.
How can we allow them to retire without resorting to a reverse mortgage. One solution, home equity line of credit. Let's say they forcast their monthly expenses to continue their lifestyle at $3000 per month. Let's also assume they do have some social security that will come in month to month in the amount of $2000. They are short about $1000 per month. They can use the HELOC to float that $1000 per month. More importantly, they will have the control.
Another Option that I like... How about cashing out $300,000. Payments for that new loan will be about $2000 per month. If you invest the $300,000 at 5% really conservatively, you will generate $1250 in income, and netting you a $750 loss per month from the cost of borrowing those funds for living. Again, this situation costs money, but it gives you control. If you spend money smartly, and invest it properly, you can make retirement a lasting venture.
Really, I am just trying to brainstorm with myself a little bit, if anyone has any insight or would like to educate me about reverse mortgages, it would be greatly appreciated.
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