It is technically possible to obtain a reverse mortgage for the purposes of consolidating / repaying other debts. However, prospective reverse mortgage borrowers needs to fully understand the implications of doing so. Moreover, since it is only economical in certain situations, borrowers need to think critically about how such will impact their personal financial situations and whether there might be better alternatives.

On the surface, reverse mortgages would seem to be eminently suited for debt consolidation. For example, you could use a reverse mortgage to eliminate an existing primary mortgage. Basically, you will trade your monthly payments for one big balloon payment. Unlike a conventional mortgage – which involves greater scrutiny – reverse mortgages can be obtained for any reason, and the proceeds can be spent however the borrower wants. Moreover, the reverse mortgage will inherently eliminate the need to continue making monthly payments, since it needs to repaid only when the last primary borrower passes away or moves out. Finally, a reverse mortgage may carry a lower rate of interest than other types of consumer debt.

On the other hand, just because lenders allow borrowers to obtain reverse mortgages in order to achieve debt relief doesn’t mean they should actually be used for that purpose. Under a reverse mortgage, interest will continue to accumulate on top of interest to the extent that one’s entire home equity can be wiped out over the course of a decade or two (depending on the size of the loan). Some would consider that a reasonable trade-off for alleviating the burden of having to repay other debt, but it’s not necessarily an economical choice. In addition, when you factor in the annual insurance premiums and the fact that the reverse mortgage interest compounds on itself, the actual APR will probably be several per-cent higher than the nominal interest rate, further eliminating any financial impetus for consolidating debt.

Ultimately, it depends on the amount of existing debt, the corresponding interest rates, and one’s personal financial situation. If you have only a small amount of debt accumulating at a low rate of interest and a stable source of income, you should consider repaying the debt directly. Since reverse mortgages are negatively amortizing, obtaining one for even a modest amount can still rapidly erode your home equity.

If, on the other hand, the existing debt is relatively large and/or the interest rate is quite high, if making monthly payments is taxing your finances  and the only way you can repay the debt is if you sell your home, then a reverse mortgage might be the only realistic solution to maintain solvency and stay in your home.

Just bear in mind that you will still have to find a way to continue paying property taxes and hazard insurance, as well as to maintain the property for as long as you reside there. Since you have already tapped your home equity, you will have to use personal savings and income to defray these costs. Unfortunately, if your personal finances are inadequate, you may have to consider selling your home and moving into a less expensive property. If need be, you can always obtain a reverse mortgage on that one instead.

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