I had an senior reverse mortgage prospect contact me last Tuesday. He claimed his property was worth a certain amount and wanted to know how much money we would lend him.
I calculated a sum of roughly $140,000, and he decided to move forward. His goal was to take the whole amount and plop it into into his local credit union account, live off of needed funds and earn interest on the balance.
I say, "slow down there partner, I don't think this is your best choice". He has a very typical reverse mortgage need. That is the need for additional funds to cover life expenses.
All my prospective borrower wants is some monthly supplemental income.
For reverse mortgages borrowers have four ways to draw upon the money alots them. My guy on the phone chose the one most likely to hurt his financial situation.
Here are the four options:
The 1st option is to receive a lump sum. This the option my borrower was looking for, so he thought. A borrower may draw out any denomination less than that which the lender is willing to lend that particular borrower.
The second option is for the lender to send monthly draws to the borrower. The borrower can choose to receive money until death, in which case the lender sets the amount the borrower will receive. Or the borrower can set an amount to be received every month.
The third is taking a line of credit. The line of credit allows the borrower to pull money out of of the line of credit any any time. The benefit of the LOC is that interest is that unused money is not accruing interest against the equity of the home while it is still in the line of credit.
Another important point to note about the line of credit is money sitting in the line of credit is accruing interest for the borrower's favor thus increasing borrowing power over time.
The last option is a combination of the forementioned options.
In my borrowers case the line of credit option was his best choice because he didn't need a large lump sum up front. He only needed some money from time to time. Additionally, by using the line of credit is interest burden would be kept to a minimum.
The point is it is all situational. Your situation determines the best choice for you.
