In many ways, a reverse mortgage can be a saving grace for your finances. It can help you eliminate long-standing debt, pay for a critical medical expense, or simply allow you to live the retirement lifestyle you want without worrying about money. However, a reverse mortgage–just like any other loan–requires ample financial responsibility.
When managed right, a reverse mortgage can be a major financial tool to help you build a comfortable retirement; we’ve already established that. But in the wrong hands, a reverse mortgage can do more harm than good–from outliving your mortgage proceeds to, in worst cases, defaulting on your loan.
So, what can you do to reap the full benefits of a reverse mortgage and–at the same time–avoid financial problems down the road? Whether you are just about to apply for a reverse mortgage or are well into one, here are some of the most helpful reverse mortgage management tips that you should start applying today:
Choose The Right Payment Method
There are a number of ways you can receive your reverse mortgage proceeds. Each of these payment methods have unique pros and cons, which means that there is no single payment method that works best for everyone.
Here are the different ways you can receive your reverse mortgage proceeds:
- Lump sum. With this method, you receive the entire loan amount at once. Choosing to receive your funds in a lump sum can be beneficial if you want to pay back a significant debt, or if you plan to make a big-ticket purchase. However, receiving all your funds at once also means you won’t be receiving any more in the future, making it all the more important to manage your money well so that you don’t run out.
- Fixed payments. This is perhaps the most common method of loan disbursement for reverse mortgage borrowers. With fixed payments, you receive a similar amount every month for a certain number of years, much like a pension. And unlike a lump sum, fixed payments will make it easier for you to budget your money and avoid outliving your loan.
- Line of credit. If you choose to have a line of credit, you have the ability to withdraw money from your loan only when you need it. For responsible borrowers, this method makes budgeting easier and removes the temptation to spend money just because it’s available.
So, what is the best payment method for managing your reverse mortgage proceeds? Well, it all boils down to how well you can manage money relative to how much you have at a given time. For instance, if you are better able to budget with a fixed income every month, then fixed monthly payments may be the best arrangement for you. On the other hand, if you are the type
of person who can spend money only when you need it (and someone who can say no to impulse purchases), a line of credit might be the right way to go.
If your reverse mortgage is already in full swing, you can talk to your lender about changing your payment method–as long as you did not receive your funds in a lump sum.
Budget Your Retirement Income
One of the many benefits of a reverse mortgage is that it increases your cash flow, making it easier for your retirement income to meet your needs while you age in place. But, of course, that additional cash flow won’t mean much if you don’t know how to budget it.
First things first, you have to know how much money you spend and how much you make in total. Use a spreadsheet or a budget tracking app to make things easier. Once you add up how much money is coming in and out every month, you will know if you’re spending too much–or if you have more room to upgrade your lifestyle.
By the way, we also have an article on how to use a reverse mortgage to budget your retirement income. Give it a read if you want to learn more about what a reverse mortgage can do for your retirement budget!
Hold Off on Big Purchases
A reverse mortgage can give a significant boost to your retirement income, but taking it as a sign to spend more is what leads a lot of people to outlive their reverse mortgage proceeds.
While you have the freedom to spend your loan on anything you want, it’s extremely important to resist the temptation of making large purchases–at least for now. Wait until you have established a healthy emergency fund. Better yet, save money for that big purchase instead of using your proceeds to pay for it. Why? Because if you make big-ticket purchases now, you run the risk of being short of money when you need it the most.
So, that four-week trip to the Maldives can wait. And so can that RV you’re eyeing at the dealership. Until you are at a place where you can spend significant amounts of money with minimal risk, practice the art of delayed gratification.