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Debt Payoff Plan: Using Reverse Mortgages

Debt Payoff Plan Using Reverse Mortgages

Many seniors carry debt like mortgages, credit cards, and personal loans into retirement. A reverse mortgage can provide funds to eliminate some types of debt. Understanding the pros and cons can help you decide if it aligns with your overall financial strategy.

Debt Payoff Plan Using Reverse Mortgages

Managing Debt with a Reverse Mortgage

A reverse mortgage allows homeowners 62 and older to access home equity. These funds can pay off existing debts including:

  • First Mortgages – Most reverse mortgages can pay off mortgage principal balances up to $625,500.
  • Credit Cards – Available funds can pay down credit card balances and reduce interest costs.
  • Medical Debt – Eliminating medical bills can provide financial relief.
  • Personal Loans – Unsecured consumer installment loan balances can be eliminated.

Using tax-free reverse mortgage proceeds provides an option to clear debts so they don’t impact cash flow in retirement. However, interest charges on the reverse mortgage reduce overall equity.

Reverse Mortgage Debt Solutions

A reverse mortgage line of credit offers flexibility to manage other debts:

  • Pay off highest interest rate debts first to minimize total interest costs.
  • Draw only as needed to pay monthly balances and maintain control.
  • Reserve available line of credit for future medical expenses.
  • Avoid paying lump sums toward low interest debts like mortgages.
  • Consult a HUD counselor to review your overall debt payoff strategy.

Careful use of a reverse mortgage line of credit provides strategic options for managing debt while preserving equity.

FAQs:

Can a reverse mortgage be used to pay off existing debt?

Yes, the proceeds from a reverse mortgage can be used to pay off some types of existing debt. Allowed debts include forward mortgages up to program limits, credit cards, medical bills, personal loans, and other consumer installment debt. The reverse mortgage cannot pay off any debt secured by the home, only the first mortgage. Home equity lines of credit (HELOCs) also cannot be paid off with reverse mortgage funds.

What types of debt can be paid off with a reverse mortgage?

Acceptable debts that can be paid off with reverse mortgage funds include first mortgages, credit card balances, medical bills, personal installment loans from banks, auto loans, and student loans. Debt that cannot be paid includes second mortgages, home equity loans or lines of credit, property tax liens, and most business or investment debt. Talk to your lender about your specific debt situation.

Is using a reverse mortgage for debt a good strategy?

Using a reverse mortgage to eliminate debt may be appropriate as part of an overall retirement plan, but has trade-offs. Benefits include removing burdensome payments and interest costs. However, interest on the reverse mortgage also reduces home equity over time. Look at your total financial picture including income sources, other assets, and estate planning goals to determine if it is a prudent option for you.

How does debt affect reverse mortgage eligibility?

Current debt obligations do not disqualify you from getting a reverse mortgage. However, you must have the capacity to continue making payments on any debts that cannot be paid off with reverse mortgage proceeds. The lender will review your credit report, debt balances, and income to determine if you can manage remaining debts along with property taxes, insurance, and home maintenance.

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