A reverse mortgage allows the 62+ year-old homeowner to refinance their home and receive the equity as a line of credit or a payout directly to them. Its purpose is to give seniors a chance to use the equity in their homes to help with living expenses, and it closely resembles a home-equity loan.
And it is a loan – it accrues interest and it must be paid off upon death or when the homeowner isn’t able to live in the home any longer. It could be tempting to think of taking that lump sum and investing it, but that is contrary to the intended purpose of the loan. The homeowner will likely lose access to the money, and wouldn’t be able to use it to supplement their living income.
In 2006, a few unethical lenders working with equally unethical financial advisors were caught taking advantage of seniors, forcing them to invest in specific ways. The Housing and Economic Recovery Act of 2008 made it illegal for reverse mortgage lenders to be affiliated with other financial or insurance products.
Loan officers who don’t have a lot of experience with reverse mortgages would be wise to talk with a closing attorney who does, so they will understand what borrowers can legally do with the money they receive.