Q&A: Should You Get a Reverse Mortgage?

Q: I’m 48, but when I’m 65 and own my home in Michigan outright, should I take out a reverse mortgage that would allow me to stay in my Michigan home for 15 or more years and use the reverse mortgage proceeds to buy a second retirement property in the South? Is that a good idea? My current mortgage is at 4.35%. Most of my savings are in my 403(b) plan at work.

Ric: Think about what you’re saying. You’re talking about giving a lot of money to the lender so that you can ask the lender in the future to give it back to you monthly at a high rate of interest on a limited basis.

Wouldn’t it make more sense to invest the funds you plan to give the lender and use those earnings to buy the second property?

When you pay off a 4.35% mortgage, that’s the equivalent of earning 4.35% in an investment. The effective interest rate on a reverse mortgage will be higher. Currently, such rates range between 5% and 12%. So you’d be paying off a 4.35% loan in order to get a new one at a higher rate. That doesn’t make a lot of sense, does it?

I recommend instead that you continue to make your current mortgage payments. Don’t make extra payments. Then invest your other available resources in a diversified manner for the next 17 years, and use the money you will accumulate to buy your second property.

Originally published in Inside Personal Finance July 2015

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