3 Reverse Mortgage Cash-Out Options

When you qualify for a reverse mortgage the lender will take into consideration the value of the home, the age of the youngest borrower, and the interest rate.  The lender plugs these numbers into an algorithm and out pops how much money you qualify to receive.  It is not a set number because of the variables. 

Regardless, the borrower will have access to receive roughly 50% to 75% of the value of the home.  The question is how to receive that money.   To answer this the borrower should choose such that he or she maximizes long term equity in the home.  This is their money so why waste it by choosing a poor cash-out option.

Three cash out options:

1.       Lump Sum:  The borrower can simply choose to pull all of the money out at one time.  This is the simplest and most basic use of the reverse mortgage.  The fixed rate and adjustable rate reverse mortgage offers this option.   The ARM mortgages generally allow a greater loan amount and the fixed offers more security.

2.       Fixed Monthly Payments:  The borrower may want to supplement income in some way.  They really have two choices here in that the borrower can choose a monthly amount to receive or the borrower can choose to receive a payment for life.  If the borrower chooses the latter the lender’s algorithm determines the maximum payment the borrower can receive for life.  If the borrower chooses the former, and the amount is more than the lender would choose for a lifelong payment, the mortgage will have a payment ending date.

Only the ARM can accommodate this product.

3.       Line of Credit:  This is by far the most popular reverse mortgage product because it allows borrowers to use their proceeds as needed.  If the borrower doesn’t need all of his money today why take it out and pay interest on the money?  The answer is there isn’t, which is why the line of credit is so popular.  The line of credit allows the borrower to take money out as needed and interest is only charged on moneys used.  Any money left in the line of credit does not accrue interest against the home’s equity. 

The line of credit is only available for ARMs. 

Although almost everyone chooses to use a line of credit they typically combine it with one of the other mortgages.  A typical scenario is to pull a lump sum out at close of escrow and keep the remaining balance in a line of credit.