Would a home equity loan or second mortgage work better?
Some seniors who are intimidated by the idea of a reverse mortgage wonder whether it would be simpler to get a home equity loan or a new mortgage that allows them to take some equity out of their home. The problem with this approach is that you now have to begin making traditional mortgage payments, thereby cutting into your monthly cash flow & savings. Suppose that you own a home worth $250,000 with no mortgage debt. You decide to take out a $100,000, 15-year mortgage at 8 percent interest. Although you will receive $100,000, you’ll have to begin making monthly payments of $956. No problem you may think; I’ll just invest my $100,000 and come out ahead. It’s not that simple. Most seniors are more comfortable with government or high grade corporate bonds which generally yield between 5% and 6% – far short of the amount you would need to cover your monthly mortgage payments. You could invest in stocks and earn the market average return of 10 percent per year, which is not guaranteed. In
