Raise Cash For Investment

As a general rule, taking a HECM with the intent of investing the proceeds to earn a profit over the cost of the HECM is not recommended. The cost of funds is the HECM interest rate plus the FHA mortgage insurance premium. In November 2012, this was over 6%. To make money, the senior has to earn a return on investment above the cost, which very few can do in today’s market except by purchasing financial assets that carry substantial default risk.

One possible exception would be the senior who has a thriving business with great promise that needs additional funding. If I had such a business and if it came down to using a HECM to keep it afloat or letting it die, I would probably use the HECM. But few seniors have thriving businesses.

Another possible exception would be the senior who has very high-cost debt, on credit cards for example. Paying off a credit card balance on which the senior is paying 20% is an investment yielding 20%, or well above the HECM cost.

If a senior is determined to use the HECM to finance the purchase of financial assets, they should use the fixed-rate version. Using the adjustable rate version, the senior would be assuming interest rate risk on top of default risk, because the ARM rate adjusts monthly and could balloon in a very short period.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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