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Should You Draw All Cash Upfront?

HECM Reverse Mortgage - Should you draw all cash upfront?

It may be unavoidable if you still have a substantial balance on your mortgage when you retire. This uses a reverse mortgage to make the best of a bad situation. It replaces debt that must be repaid in monthly installments with debt that doesn’t have to be repaid until you die or move out of the house permanently.

The down side is that the cost of the HECM, which includes mortgage insurance and other upfront fees, will usually exceed the cost of the forward mortgage. Further, if you use all or most of the proceeds from a HECM to repay a forward mortgage, you lose the ability to draw spendable cash from the HECM in later years.

Another situation that may call for withdrawing the maximum amount of cash at the outset is if you are determined to buy a house. Some seniors want to become homeowners for the first time – a “better late than never” decision. Others are homeowners now but want to sell their current home and purchase a different one, perhaps smaller or located closer to family.

These are lifestyle decisions that may be well-considered and sound, or they may be hasty and ill-conceived. I have seen both types, but the only general rule I know for avoiding bad decisions is not to act in haste, and consult those who play a role in the plan. It is a particularly bad idea to move in order to be closer to family without first discussing it with them. They could be planning a move of their own!

Given your decision to buy a house, using a HECM for that purpose beats the alternative of buying with a forward mortgage and paying it off later with a HECM. The advantage is that it requires only one set of settlement costs instead of two. But the downside is the same as that associated with using a HECM to pay off a forward mortgage. In both cases, the HECM is not available to ease the financial burdens of retirement.

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