My clients often ask me how they should invest the loan proceeds available to them from the Reverse Mortgage and more specifically, whether or not they should purchase an annuity. I wanted to take a minute to talk about loan proceeds and why the answer to that question is always no.
An annuity is basically an investment that pays out a fixed amount of money over a fixed period of time. For example (hypothetical numbers) you could buy a $100,000 annuity and it would pay you a certain amount of money for a certain period of time, say $1,300 for 6 years. At the end of that time period the annuity would be gone and you would not receive any more money. The annuity also costs a certain amount of money to set up and that will vary from company to company.
The reason you don’t want to use your loan proceeds to buy an annuity is because the monthly payment option (See how to take my proceeds Part 3) already pays you the same way that an annuity pays you and does not cost any more money to set up. In addition, you only accrue interest on the payments you have received and not the full amount of your loan proceeds. If you took a full draw of your funds and purchased an annuity with them you would be charged for doing the reverse mortgage, charged interest on the full amount of the funds that you draw, and charged when you buy the annuity.
If you need monthly payments the best thing you can do as a consumer is to set them up through the Reverse Mortgage. It will not cost you anything extra, you will save money on interest accrual over time, and you will avoid the additional cost of purchasing the annuity that you don’t need.