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Old age is said to be a blessing, yet comes with its own challenges. You can have a perfect retirement plan with enough savings and investments to cushion you financially during retirement, however, poor health and other unforeseen circumstances can throw your finances to the south. As such, many retirees end up struggling financially in this critical part of their life.
Luckily, seniors who own a home can use their home equity for loans like a reserve mortgage. A reverse mortgage provides homeowners who are 62 years and above the opportunity to convert some of their home equity into cash. With this, homeowners who qualify can receive much-needed financial assistance to fund their retirement, pay medical bills, undertake a home renovation project, etc. This sounds great, right? You can use the ARLOs reverse mortgage calculator tool to check how much reverse mortgage your home is worth. But can seniors use their loan proceeds for investment and is it advisable?
Is it safe to invest your reverse mortgage proceeds?
Lately, several investment opportunities, including crypto investment, bond, and stock investments, are promising juicy short-term and long-term returns. Many people are therefore tempted to secure all kinds of loans including taking a reverse mortgage for such ventures. Is it safe to do that?
Well, reverse mortgage borrowers are at the liberty to use their proceeds for almost anything they deem fit. It could be for renovation works, offset a loan, support monthly expenses, pay homecare bills, etc. In fact, reverse mortgage lenders have no business to interfere or require borrowers to make any investment or purchase an annuity before granting the loans, thanks to the cross-selling prohibitions. So, practically borrowers have the freedom to use their loan proceeds for anything legal. But, should this include using it for risky investments? The answer is no.
Why you shouldn’t use reverse mortgage proceeds for investment
A reverse mortgage can be a great retirement financial planning tool. That notwithstanding, it isn’t advisable to use it for financing an investment tool. This is why.
Impact negatively on your investment returns
A reverse mortgage is a loan facility that comes with interest. Consequently, whatever you are investing in must offer an interest higher than what you have to pay on the loan. With the average reverse mortgage interest ranging from 4.8% to 6.0%, whatever you are investing in must offer you a higher interest to make a profit.
Well, some high-yield investments offer very high returns on investment (ROI), and you can make some good profit in the long term. That notwithstanding, whatever profit you make wouldn’t be the same as if you had invested your own money. This is because part of your returns will go into servicing the interest on the reverse mortgage. If you received a 10% ROI and the interest on the reverse mortgage is 6% you will be left with just 4% as a take-home profit.
The investment can fail
Using borrowed money for investment can be a very risky financial decision. Just as you make profits on investments, you can as well make losses. The investment can perform poorly, leaving you with huge losses. If such a scenario, you may lose all or part of your reverse mortgage proceeds depending on how much you invested. Nonetheless, the loan is still there to be paid. That aside, if the investment fails to yield returns higher than the interest on your reverse mortgage, you’ve made losses. It is therefore better to invest with monies you can afford to lose and not by risking your home.
You can fall into financial distress
If the investment fails, you can fall into financial difficulties. Most seniors take a reverse mortgage loan to supplement their monthly expenditures, pay medical bills, or for home maintenance purposes. If you took the loan for any of the mentioned purposes, yet decided to invest it to make some extra cash, you will be in trouble when the investment fails. This means you won’t have the much-needed fund to support your monthly expenses or pay medical bills. You may therefore have to take other loans or rely on the benevolence of family and friends to have a decent living.
If will affect your estate
Taking a reverse mortgage means, after your demise or when you move out, your lender will take possession of the house. It will be put on sale for the lender to recoup the loan and interest. The balance is what goes to your heir. This means you will have nothing or very little to leave your heirs when you die.
Conclusion
Investing is one of the best ways to achieve financial freedom, though it comes with minimal to high risk. However, investing with a reverse mortgage loan or any kind of loan is one of the riskiest financial decisions you can ever make. You need to take risks to succeed, but they should be reasonable risks. No matter how juicy the said investment tool is, avoid financing it with a reverse mortgage. You don’t only put yourself into a financial mess, but it will also affect the estate you leave behind.
