When a senior, over 62 years old, takes out a reverse mortgage, he or she has several options with regard to how to take the proceeds. First of all, reverse mortgage proceeds are tax free! For many seniors this is a huge benefit, especially if they are now taking out taxable funds from 401K /IRA accounts.
The first option for taking funds is to take monthly income for as long as the senior lives in the property. A check can be sent each month, or it can be direct deposited into their checking account for convenience. The amount they can take will vary depending on age and property value and equity. Your reverse mortgage lender can also set up monthly income for a specific time frame. Let’s say the senior has a piece of property they will be selling in a few years. The senior can take more monthly income for a shorter period of time knowing they will have more income later.
The second option for taking funds is to take them as a lump sum. The senior should be very cautious that they put these funds into something safe. There are horror stories about seniors taking out a reverse mortgage and then investing in some kind of annuity which ties up their money and they don’t have it when they need it. Remember, even though the lump sum is tax free, any interest earned on that lump sum, could be taxable.
The third option is actually the most popular. This is to take the money in the form of a line of credit. The senior can take out funds whenever they need them , say for property taxes, or a home repair and the rest of the money that stays in the line of credit actually grows tax free! This way, the senior benefits from the growth on the money they are not using.
The last option is to combine these other options. For example, I have a customer who elected to take some of her money upfront and the rest as monthly income. I have other customers who take the line of credit but take some as an upfront lump sum.
Which option is right for you? Every situation is different. Discuss all these options with your reverse mortgage specialist. Make sure you chose the option that works best for your situation.
Brenda Wheeler, Reverse Mortgage Specialist, M & I Bank Indianapolis