reverse mortgage

[drakethib]

Long story short, I know of some senior citizens who are considering this.


Can anyone give me the skinny on it

Thanks

 

[rie'smom]

http://www.nls.gov/offices/hsg/sfh/hecm/rmtopten.cfm

 

[JerseyGirl84]

Another interesting site with phone number to HUD and AARP to help advise your friends. I would hate to see them taken advantage of.

http://debtprison.net/wordpress/94/the-good-the-bad-and-the-reverse-mortgage/

 

[Cheshire Figment]

I looked at the link that JerseyGirl84 posted and read the article there. I agree with everything that was said there.

It should only be used as a last resort if you need money to pay bills to live, and you expect to remain in the house for the rest of your life.

Under no circumstances should you use the proceeds for any investments at all, and never pay anyone a "finder's fee".

Mike (CPA Retired)

 

[allison443]

I have relatives who took out a reverse mortgage on their home. However, it was like a line of credit, where they only withdrew the amounts they needed. They don't get monthly payments from the reverse mortgage. In their case, their pensions and social security are enough to cover their monthly bills. However, they do not have a lot sitting in savings. They have owned their house for almost 50 years and they paid $7,000 for it and it is now worth conservatively at least $500,000 (yes, even in this market!) (It is in NYC). They will never move.
They used a lump sum from the reverse mortgage to make some home improvements/modifications so they can stay there as they age, and also to purchase a car to replace their existing vehicle.

I agree the closing costs were high. However, they did not see another solution since their largest asset by far is their paid-for home, which they did not want to sell, and they did not have a lot sitting in savings. This solution worked well for them and they are happy with it.
However, all situations are different of course!

 

[ChickieToo]

I did a lot of research on this for my in-laws a few years back. Got the info from a very reputable financial management guy in my area. The basics based on info I at that time are as follows:

It is a HUD-approved mechanism and HUD developed the whole reverse mortgage industry. The lender appraises the house. Then they will allow a reverse mortgage for up to 80% of the value. You can take the money in a lump sum, as a monthly distribution, or have a checkbook and write checks against the amount you have set aside, or some combination thereof. The house doesn't have to be sold until both spouses were deceased. Then the house gets sold and you pay off the reverse mortgage lender the amount of money you actually used, or took as a lump sum. There is also an interest payment at that time. The thing my in-laws got stuck on is that the upfront fees were about $16,000. I know that is a lot of money, but I think you have to look at it practically: the banks are covering their a$$ets in the event the borrower dies before they can acrue much interest. To my mind, my in-laws were never going to see any of that $16000 anyway, because the equity was in their house and would just get passed on to their estate after they died. If you think about how much interest you pay on a yearly basis on your mortgage, that $16k is about 2 years worth depending on you interest rate and amount of money owed, and DH and I though it was reasonable given that they would be getting to stay in their house.

Based on what I found out, it really is a pretty good system for people who want to stay in their house and need help meeting their monthly expenses. It's not a good thing if you owe a lot on your home because you have to pay that off with the reverse mortgage loan when you take out the loan.

My in-laws were broken-hearted at the possibility of selling their home. The loved it, but it needed some work, and they explored all possibilities trying to stay in their home. When all was said and done, they opted to sell the house and downsize. But that didn't go smoothly either--it was a 90+ year old home, and it couldn't be sold without a new septic which set them back about $25k and that ate up a lot of their equity for the new house. They wouldn't consider an over 55 place, or a much cheaper condo. So they sold and now, 3 years later, they really hate their new, smaller house--which they still have about a $40k mortgage on. They also dislike their neighborhood and the town. They now wish they stayed in the old house, because this one needed work too and they are spending money on repairs anyway. The reverse mortgage would have let them do stay in their house, but that 16K was a bitter pill they couldn't get past.

It isn't a solution for everyone, but in my opinion, something to consider when weighing your options.

 

[MrsPete]

I wouldn't do this IF other options exist. Obviously none of us knows how many years we have left to live, but since these mortgages are usually sold to elderly people, the bank is usually going to "win" with these things.

Let's talk about my grandmother, who is 96 years old and is in need of money. She owns a small, immaculate home worth about $150,000 (I know that'd be a cardboard box in some areas of the country, but here it's a small but nice, all-brick home in a good neighborhood). She does have a mortgage on this house, so a reverse mortgage probably wouldn't be an option for her. But let's pretend it is for the example: If she took out a reverse mortgage, she'd have to pay large up-front fees to the bank . . . then she'd get a "paycheck" for the rest of her life, but remember that she's 96 -- IF she lives to be 100 and received $500/month, she'd only get $24,000 . . . and then when she passes away, the bank would have her up-front fees and a house worth $150,000. They'd profit something like $130,000 for a relatively short-term investment. Obviously, some assumptions are involved in my math; it's possible that she could live to be 120 -- but the bank's guessing that she won't.

Do the senior citizens you know have families? I'll tell you what we've done, my grandmother and me: She offered ME the house, and I'm buying it from her. I'm essentially "taking up payments" on the house, and I've promised to take care of the taxes and all repairs for as long as she lives. She, in exchange, has complete use of the house -- again -- as long as she lives. When she passes away, the house will be mine to rent, sell, or use myself.

She's happy in that house, and she hopes to live there for the rest of her years. My husband and I are also making contingency plans for her to move in with us IF that should become impossible (we're looking at adding another bathroom and turning our office into a bedroom). She's also happy that the value of her house will stay with me and my children rather than going to the bank.

 

[MrsPete]

the upfront fees were about $16,000. I know that is a lot of money, but I think you have to look at it practically: the banks are covering their a$$ets in the event the borrower dies before they can acrue much interest.

If the owner dies before the bank can accrue much interest, the bank is going to have the property, which they can sell for huge profit! From their point of view, that situation is a huge win for them!

 

[Cheshire Figment]

If she took out a reverse mortgage, she'd have to pay large up-front fees to the bank . . . then she'd get a "paycheck" for the rest of her life, but remember that she's 96 -- IF she lives to be 100 and received $500/month, she'd only get $24,000 . . . and then when she passes away, the bank would have her up-front fees and a house worth $150,000. They'd profit something like $130,000 for a relatively short-term investment.

If the owner dies before the bank can accrue much interest, the bank is going to have the property, which they can sell for huge profit! From their point of view, that situation is a huge win for them!

Neither of these statements are correct.

The bank does not have an ownership interest in the house on a reverse mortgage; they have a mortgage.

When the (last) owner dies the house passes into the Estate. At this point the mortgage becomes due.

If there is sufficient funds in the Estate, the mortgage is paid off and the beneficiary(s) keep the house. If there are not sufficient funds the house is sold and the bank gets the principal, interest and fees that have accrued while the beneficiary(s) get the remainder.

So all the bank will get are the initial fees rolled into the mortgage, any money taken out, whether by lump sum, regular payments or a checkbook, and the accrued interest. Everything else goes to the Estate.

Actually the bank is taking a chance; if the house cannot be sold for an amount that will cover the fees, principal and interest they do not have any recourse against the Estate or the beneficiary(s) for any additional money.

 

[allison443]

Wow, you are seriously misinformed! When the homeowner dies, the bank is only paid back what they gave to the person. The bank doesn't get the house!! In your example, the bank would have received its upfront fees and upon your grandmother's death, the amount of the mortgage would be paid. In this case, the bank would get the $24,000 it gave to your grandmother. It wouldn't get the house-that goes to the estate. Now oftentimes the house is sold to repay the bank and distribute the rest of the house's value to the heirs. That is completely different from the entire $150,000 house going to the bank.

Also, are you aware that reverse mortgages don't always consist of a monthly payment to the homeowner? In the example I gave in my prior post, it functions almost like a heloc, except repayment to the bank is not made until the last homeowner dies.

 

[allison443]

Neither of these statements are correct.

The bank does not have an ownership interest in the house on a reverse mortgage; they have a mortgage.

When the (last) owner dies the house passes into the Estate. At this point the mortgage becomes due.

If there is sufficient funds in the Estate, the mortgage is paid off and the beneficiary(s) keep the house. If there are not sufficient funds the house is sold and the bank gets the principal, interest and fees that have accrued while the beneficiary(s) get the remainder.

So all the bank will get are the initial fees rolled into the mortgage, any money taken out, whether by lump sum, regular payments or a checkbook, and the accrued interest. Everything else goes to the Estate.

Actually the bank is taking a chance; if the house cannot be sold for an amount that will cover the fees, principal and interest they do not have any recourse against the Estate or the beneficiary(s) for any additional money.

I wish I had seen your post before I posted because you explained it more clearly than I did.

 

[ChickieToo]

Neither of these statements are correct.

The bank does not have an ownership interest in the house on a reverse mortgage; they have a mortgage.

When the (last) owner dies the house passes into the Estate. At this point the mortgage becomes due.

If there is sufficient funds in the Estate, the mortgage is paid off and the beneficiary(s) keep the house. If there are not sufficient funds the house is sold and the bank gets the principal, interest and fees that have accrued while the beneficiary(s) get the remainder.

So all the bank will get are the initial fees rolled into the mortgage, any money taken out, whether by lump sum, regular payments or a checkbook, and the accrued interest. Everything else goes to the Estate.

Actually the bank is taking a chance; if the house cannot be sold for an amount that will cover the fees, principal and interest they do not have any recourse against the Estate or the beneficiary(s) for any additional money.

We have the same understanding of this if you re-read my post. Clearly it is a mortgage instrument designed to make money for the banks--all loans are. But I think under certain circumstances it is a good way for seniors to have access to what is usually their greatest asset. Some people worry a lot about leaving money to heirs, but I believe that the elderly should worry about themselves first and if using their money from their home allows them to live their life out comfortably, it may be a good option under certain circumstances.