How to Pay Off Higher-Interest Debt with Proceeds from a Reverse Mortgage


When choosing to take a reverse mortgage to pay off higher-interest debt, it’s important to know that it is also a kind of debt that charges interest. Understanding how they work, and their impact on your financial situation can help you decide your best course of action. A qualified financial advisor can also help you weigh the pros and cons of this financial vehicle. 

How Reverse Mortgages Work 

It is important to understand that a reverse mortgage loan is a type of debt that comes with its own set of requirements. Borrowers can stay in their homes and no longer make monthly mortgage payments. To enjoy this privilege, borrowers must meet certain eligibility requirements. 

What Are the Eligibility Requirements of a Reverse Mortgage?

  • Borrower must be 62 years or older to be eligible for a home equity conversion mortgage (HECM)
  • Have substantial equity in the home
  • Pay property taxes, homeowner’s insurance, and other home-related fees
  • Live in the home as their principal residence
  • Maintaining the home

Pay Off Higher-Interest Debt  

The burden of higher-interest debt can be a significant challenge for seniors on a fixed income. According to a 2016 study conducted by the National Council on Aging, 60% of older adults carry debt into retirement. Credit card balances are one of the most common types of debt. Higher-interest rates on credit cards can make it difficult to pay down the debt. Minimum payments barely cover the interest charges. 

A reverse mortgage loan can provide an option by allowing seniors to access a portion of their home equity to pay off higher-interest debts. With any analysis, paying off debt with reverse mortgage loan proceeds should include comparing the rate on your reverse mortgage loan with the interest rate on your existing debt to determine if the features of this loan are helpful to your financial situation. If a reverse mortgage loan does work for you, funds obtained from this loan can be used to pay off credit card balances, auto loans, or other debts with higher interest rates. 

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Reduce the Amount You Owe by Paying Cash  

With certain types of debt, especially medical expenses, you may be able to negotiate how much you owe on your balance. For example, some doctors’ offices and hospitals will reduce their charges by a certain percentage to help return the account to good standing. However, this option is sometimes only available to those paying the debt immediately and with cash. A reverse mortgage could be one source of ready cash.  

Pair Payout Options with Your Financial Strategy  

Borrowers have payout choices from their loan proceeds with a reverse mortgage. These include a lump sum, monthly installments, a line of credit, or a combination of the three. These choices allow borrowers to target their higher-interest debt in a way that makes sense for their financial strategy.  

Deciding which payout option to choose depends on several factors. Here are a few questions to ask yourself: 

  • Do you have loans with higher interest rates? Target higher-interest debt by choosing a lump sum payout and an option for a line of credit or monthly installments.  
  • What type of higher-interest debt are you carrying? Student loans and tax debt have specific repayment terms and may require monthly payments. You may receive the proceeds via monthly installments and a line of credit that you can use later.  
  • What are your financial goals? To pay off your higher-interest debt off quickly, receiving your proceeds as a lump sum may make more sense. If you take a more measured approach, receiving monthly installments for your proceeds may fit your long-term financial strategy.  

Paying Down Higher-Interest Debt Can Reduce Your Emotional Burden 

Carrying around higher-interest debt can feel burdensome, especially if you watch the balance grow despite your monthly payment. Over time, the stress of mounting bills can create long-term issues in other areas.  

The National Council of Aging reports that many seniors make trade-offs because of their debt. Seniors avoid making crucial car or home repairs that may increase fall risks. Others admit to skipping meals, which can have health or nutritional implications.  

A reverse mortgage loan offers one way to pay off bills. The loan could welcome more positive emotions that could make a difference in an individual’s well-being. A reverse mortgage loan works by making one or more payouts to a borrower based on the equity in their home. No monthly mortgage payment would be required in a reverse mortgage loan, although the borrower is required to comply with the loan terms, such as maintaining the home and paying property taxes and insurance. The balance of the reverse mortgage loan increases over time as interest is capitalized to the loan balance. The loan is generally required to be repaid when the borrower sells the home, moves out of the home, or dies.  

Consult with your financial planner to understand how best to approach your debt and the full impact of getting a reverse mortgage on your financial strategy.