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Investing Reverse Mortgage Proceeds

January 25, 2009

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

With many families strapped for cash, increasingly more older Americans are turning to reverse mortgages to generate income while staying in their beloved homes. If you have decided to use a reverse mortgage, you should try to avoid spending all the proceeds as they come in. It could be important to invest some of that money for the future.

Reasons to Invest Reverse Mortgage Proceeds

While people tend to lean on a reverse mortgage for living expenses, you may find that your needs extend beyond the length of the reverse mortgage:

  • You could outlive the income from your reverse mortgage. While you won't have to repay the loan until you die, the length of time for which you'll receive payments (depending on which program you choose) may be finite.
  • You may have to give up your home. Reverse mortgages have to be repaid if you move out of your home. As you get older, you may find a your house impossible to maintain.
  • You may see an increase in medical expenses. Even with coverage, deteriorating health inevitably leads to unexpected expenses.

Short-Term Investment Options

Given the need to invest reverse mortgage proceeds, what are your best options? This discussion will focus on short-term investment options, on the assumption that people who opt for reverse mortgages need a reasonable amount of access to those proceeds. Here are three major categories of short-term investments:

  • Savings Accounts. Savings accounts give you the most access to your money, especially savings accounts with a debit card option. However, this access comes at a price--savings account rates are likely to be lower than the interest on other short-term investment options. There are high-yield savings accounts, but you'll want to read the fine print to understand any limits on your access to the money. To find the best rates, don't feel restricted to your local bank--shopping online for savings accounts can help you locate the best deal.
  • Money Market Accounts. Money market accounts are similar to savings accounts, but often pay higher interest and may carry certain restrictions, such as a minimum balance or a limited number of transactions allowed per month. Be sure you use online resources to make money market rate comparisons.
  • Certificates of Deposit (CDs). CD interest rates are likely to be the highest-paying short-term options, though in exchange for these CD rates you lock your money up for a specified period of time. In fact, the highest CD rates are generally associated with the longest commitments. Current CD rates are highly variable, so check up-to-date information to get the best CD rates. Once again, online resources are a valuable tool for locating the best CD investments.

Finally, very low income seniors receiving certain benefits should learn how taking their reverse mortgage proceeds as a lump sum could affect their eligibility. It may be wiser to opt for monthly payments instead.

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