Reverse mortgages may be viable retirement assets for many senior homeowners, however, there is a point when they can become too big of a risk to accomplish certain financial planning strategies, according to an article from TIME.
In recent a Q&A, TIME fielded a question from one reader, who asked if he could take out a reverse mortgage and invest the proceeds in an account that would pay a “decent rate of return.” Citing that his home is paid off and the equity is just “sitting there” drawing no return, the reader then asked that if he repays the loan in 10 or 20 years with the money invested would he come out ahead?
While in theory this would sound like a good strategy, to achieve the kind of return the reader is looking for would require taking on a fair amount of risk, wrote TIME contributor Donna Rosato.
“Now here’s why it would be hard to come out ahead by investing money from a reverse mortgage,” Rosato writes. “First, reverse mortgages are costly loans to pay back compared with traditional loans. Reverse mortgage rates are currently about 5%, versus about 4% for a typical 30-year fixed rate loan. Closing costs are typically higher too.”
Considering this, Rosato suggests that a person will need to aim for a 7% – 8% return to cover taxes and interest.
“To find an investment that would give you that kind of return, you’d have to take on more risk,” she writes.
There are still situations where a reverse mortgage makes sense, especially for retirees who are cash-poor and house-rich, said Tom Mingone, founder and managing partner of Capital Management Group of New York, in the article.
If money is tight, then the payments from a reverse mortgage can provide a new steam of income, the article states. Or if a person has a mortgage on their current home and it’s hurting his cash flow, then a reverse mortgage can be used to pay off the conventional loan and eliminate that expense.
“There are definitely times when using a reverse mortgage is a smart move, but investing the money isn’t one of them,” said Mingone.
Read the TIME article.
Written by Jason Oliva