Can I Use a Reverse Mortgage to Pay Off Debt?
Yes. For a homeowner with substantial home equity but too much monthly debt, a reverse mortgage can potentially be used to pay out an existing mortgage, consolidate other debt and materially improve monthly cash flow.
← Back to Reverse Mortgage QuestionsDebt Consolidation Can Be One of the Most Practical Uses of a Reverse Mortgage.
The objective is not simply to move debt. It is to use home equity strategically to eliminate required monthly payments and create a more manageable retirement cash-flow position.
Pay Out an Existing Mortgage
Reverse mortgage proceeds can potentially be used to pay out the mortgage already registered against the property.
Pay Off Credit Cards
High-interest credit-card balances can potentially be eliminated as part of the overall debt-consolidation strategy.
Consolidate Lines of Credit
Lines of credit and other debts may also be dealt with when there is enough available equity and the financing structure allows it.
Reduce Monthly Obligations
Eliminating several required debt payments can create a significant improvement in monthly retirement cash flow.
No Required Monthly Mortgage Payment
A reverse mortgage generally removes the requirement to make regular monthly mortgage payments, subject to the mortgage terms.
Enough Equity Is Required
The property must support the reverse mortgage amount needed to deal with the existing secured debt and provide any additional funds required.
The Real Benefit Can Be What Disappears From Your Monthly Budget.
A homeowner may have significant net worth tied up in the home while still struggling every month with a mortgage, credit cards and other required debt payments.
A reverse mortgage can potentially restructure those obligations so the homeowner no longer has to service the same collection of monthly payments from retirement income.
Paying out the existing mortgage can eliminate that required monthly payment.
Paying off high-interest balances can remove another major monthly obligation.
Consolidating additional eligible debt can further reduce the amount required each month.
The result can be substantially more disposable monthly income without having to sell the home.
The Monthly Payments May Disappear, but the Debt Does Not.
The debts being paid out are replaced by the reverse mortgage. If voluntary payments are not made, interest can accumulate on that mortgage balance over time, reducing the equity that would otherwise remain in the property.
Interest Accumulates
If you choose not to make voluntary payments, interest can be added to the reverse mortgage balance.
The Balance Can Grow
As interest accumulates, the total amount owing under the reverse mortgage can increase over time.
Future Equity Can Be Reduced
A larger mortgage balance means less equity remains for the homeowner or estate, all else being equal.
Existing Secured Debt Must Be Dealt With
Mortgages or other secured debts the reverse lender requires to be discharged need to be dealt with from the proceeds at closing.
Net Proceeds Matter
We need to calculate what remains after required mortgage payouts, debt consolidation and applicable closing costs.
Compare the Alternatives
The right decision compares the cost and equity impact of the reverse mortgage with the realistic alternatives available to the homeowner.
The Question Is Whether the Improvement in Cash Flow Is Worth the Long-Term Cost.
For an older homeowner carrying substantial monthly debt payments, a reverse mortgage can potentially convert home equity into significantly better monthly cash flow. The trade-off is that the reverse mortgage balance can grow over time and reduce future equity.
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