If you’re seriously considering taking out a reverse mortgage, you probably know by now that you can use the proceeds of your loan for just about anything.
However, even though you as a borrower are free to do as you wish with your money, using it to make investments is not recommended.
In order to protect borrowers, the government has enacted “cross-selling” prohibitions that prevent reverse mortgage lenders from requiring or having any involvement in a borrower’s decision to purchase an annuity or make any other sort of financial investment.
Additionally, under the Housing and Economic Recovery Act of 2008, lenders can’t be associated with any other financial or insurance product without appropriate safeguards in place, and reverse mortgage originators can’t also sell other financial products, such as annuities.
Reverse mortgages shouldn’t replace retirement savings
In some circumstances, people take out a reverse mortgage as a financial planning tool and tapping into your home’s equity could provide a great supplement to your retirement savings.
But a reverse mortgage probably shouldn’t take the place of retirement accounts, says certified financial planner Ed Landis, owner of Annapolis, Md.-based Landis Financial Services.
It’s generally not the best idea for borrowers to invest the proceeds of their loan, he says.
Further, most insurance companies are very cautious about allowing reverse mortgage borrowers to invest the proceeds from their loans, says Landis.
Any investment carries risk, and the older you are, the riskier it is to make investments, because you don’t have as much time to make up for possible losses.
Choose your payment option to fit your needs
Landis says he wouldn’t recommend any sort of investment, because of the inherent risks in investing and the fact that returns won’t necessarily outweigh the costs of taking out a reverse mortgage.
For example, the monthly interest that accrues on an investment may actually be less than the rate of interest on your loan. Or, in the long run, your overall return on the investment could be less than the origination costs and other fees associated with opening your reverse mortgage.
Borrowers can choose between a few different options when deciding how they want to receive the proceeds of their loan, such as a lump sum, monthly payments, a line of credit, or some combination of two of these options.
While using a lump sum to buy Treasury bonds or certificates of deposits (CDs) are fairly “safe” investment options, according to Landis, they don’t promise much of a payout, so it probably isn’t a worthwhile investment strategy.
If borrowers are looking to free up money to supplement their income, it’s better to choose the monthly payment option rather than getting a lump sum and buying an annuity, suggests Landis.
Investing is inherently risky, and therefore potentially unsafe. Instead of placing your reverse mortgage money into an investment, consider which type of payment option best fits your particular financial situation.
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