For a retiree on a finite budget, carrying multiple debts that require monthly payments can feel like swimming against the current. Especially when high interest rates mean those monthly payments don’t meaningfully cut into the principal owed. Whether you have high-interest credit card and automotive debt or no-interest medical debt, if your monthly payment obligations are taxing the limits of your monthly budget, a reverse mortgage may offer some breathing room.
A reverse mortgage loan is also a type of debt that will eventually need to be paid back. However, unlike loans that require monthly payments, a reverse mortgage balance isn’t due until the end of the loan. At that time, the amount due will include the principal plus interest that has accrued and compounded over the life of the loan. Here’s more about how reverse mortgages work and how using one to pay down other debts may work in your favor. We’ll also discuss the tradeoffs and risks involved with using a reverse mortgage to consolidate debts.
A reverse mortgage is a loan and, therefore, a debt. However, it can offer a way of restructuring other debts that may improve a borrower’s overall financial position and outlook on retirement. The most obvious reason to pay off higher-interest debts with a reverse mortgage (or any other loan, for that matter) is if you are able to secure a lower interest rate, ensuring a lower output over the life of the loan. But even if the reverse mortgage loan has a higher interest rate than the debt or debts you’re carrying, the absence of monthly payments may make the trade worthwhile by increasing your monthly cash flow.
Key advantages of using a reverse mortgage to manage debt include:
- Immediate relief. People struggling to keep up with monthly payments will find the removal of those payments eases both their budgets and their mental state.
- Increased cash flow. Without the onus of multiple monthly payments eating into their budgets, people find they can focus on building up a cash repository and enjoying their lives.
- Reduced Stress. Juggling fewer loans and payments reduces stress and helps contribute to overall well-being.
- Improved financial control. Managing fewer immediate financial obligations means borrowers can focus on making better financial choices for their futures
- Reverse mortgages are loans secured by your home. Using a reverse mortgage to pay down other debts can offer immediate financial relief. However, the debt does not go away. Interest will continue to accrue and compound on the loan balance until the loan comes due. This means that the final loan balance will likely exceed the amount borrowed. The fact that the loan is secured by the home means that borrowers who do not meet the loan terms risk foreclosure on their homes. Disclaimer: : Finance of America is a division of Finance of America Reverse LLC which is licensed nationwide | Equal Housing Opportunity | NMLS ID # 2285 (www.nmlsconsumeraccess.org) | 8023 East 63rd Place, Suite 700 | Tulsa, OK 74133 | AZ Mortgage Banker License #0921300 | Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act | Georgia Residential Mortgage Licensee #23647 | Kansas Licensed Mortgage Company | Massachusetts Lender/Broker License MC2285: Finance of America Reverse LLC | Licensed by the N.J. Department of Banking and Insurance | Licensed Mortgage Banker -- NYS Banking Department where Finance of America Reverse is known as FAReverse LLC in lieu of true name Finance of America Reverse LLC | Rhode Island Licensed Lender | Not all products and options are available in all states | Terms subject to change without notice | For licensing information go to: www.nmlsconsumeraccess.org The company does not do business as Finance of America in CA, NM, NY, and OK. These materials are not from HUD or FHA and were not approved by HUD or a government agency. For Reverse Loans. When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. The lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and the lender charges interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
