Sometimes you have to face the tough issues. The topic of Reverse Mortgages is a very difficult issue. This is not a “one size fits all” solution. These difficult economic times are forcing business owners to look everywhere they can for additional capital .
Let me share some general information on Reverse Mortgages. They are generally limited to persons at least 62 years old. They operate much like a home equity loan or home equity credit line. But unlike many home equity products, a reverse mortgage does not consider a person’s credit history or income. Plus, the loans typically need only be repaid, with accrued interest, if a home owner moves, sells the home or dies.
This topic came up with a small business owner who needed additional funding to grow a business. The logic was that he could get a reverse mortgage, not have any payments to make and put the money into his business. With further discussion I found out that the equity in his home was the only major asset he had. The bank would not give him a business loan and the home equity was his only source of funds.
I looked at the business, including financials and an existing business plan. The economy had a negative effect on the income; and the money obtained from the reverse mortgage would keep the business running for another 18 months. My recommendation was not to use the reverse mortgage as a financing source for the business. I felt that the business had merit and that a restructure of the overall operation would allow the business to continue and grow.
Reverse mortgages are very complex and usually require very heavy up front fees. I have recommended them for clients that needed the equity for personal survival. Without a requirement to pay back the money, it is possible that it can benefit certain situations.
Yes, a reverse mortgage can work, but please don’t do it without seeking help from a competent financial advisor.
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