Please School Me on Reverse Mortgages

[93legendti]

When I was associated with the mortgage biz, Reverses allowed seniors 62 years or older to get the % of appraised value of their home that equated with their age, ie 70% of appraised value if the person was 70 yrs old. The fees were higher than normal mortgages, but the trade off was the payments/equity you could take out without making mtg payments. I was told by friends in the biz that appraisals for Reverses were usually more favorable than std mtgs, but I am not sure if that was true or not. Not sure if the law has changed since then.

[93legendti]

Myths dispelled and helpful info here:

http://www.aarp.org/money/credit-loa...rse_mortgages/
http://www.morningstar.com/cover/vid...aspx?id=358205

[Ken Robb]

The most important thing that I always reminded clients who were considering these loans is to have all owners who want to remain in the home as long as they wish or until they die be listed as owner/borrowers. If only one person is the borrower the loan comes due upon his death and that often means the home must be sold to pay it off.

[Peter P.]

I got a reverse mortgage for my mom through the government. I think it was CHFA. I preferred a governmental agency loan because I didn't want shenanigans from a bank or other Snidely Whiplash.

Mom got to stay in her home.

The reverse mortgage does not need to be paid back until mom dies, moves, or sells the house.

The payout can either be in the form of monthly payments or lump sums.

In order for mom to get the reverse mortgage, there could be no liens on the house. There was one on my mom's house but fortunately, they let some of the loan proceeds pay it off.

The legal and paperwork fees for the RM could be deducted from mom's payout.

Payout of the RM was a percentage of the house's value (I had to pay for an appraisal). I believe in mom's case it was 75%. There is a cap on how much can be borrowed.

The RM had to be paid back within 6 months of the death, moving, etc. In my mom's case and due to the lousy market, the house sat on the market for well over 2 years and was sold at a loss i.e., the bank didn't get all the money they were owed, considering interest. It was a short sale. The realtor took care of everything.

Interest on the loan accrued at 7 or 8%.

The reverse mortgage is classified as a loan, not income, so it can't be taxed or considered for calculations of Title 19 eligibility i.e., turning over assets if you go into a nursing home.

In mom's case, she had $10k left when she went into the nursing home. When the home was finally sold to repay the reverse mortgage, the bank didn't even want the $10k to make up for the short sale and I was prepared to give it to them.

Put proceeds from the RM in a separate account so their use can be tracked, in case those state agencies that require annual recertification for Title 19 or state aid send out those application forms-this money, classified as a loan and not income, does not have to be declared.

The reverse mortgage paid for a new roof, water heater, and various repairs as well as day to day expenses. She, like too many American homeowners, had only Social Security as her only retirement income.

PM me if you have any more questions.

[fuzzalow]

I have no interest or need for a RM, but thanks for a useful and coherent explanation. There's actually something to go on in your post and it is always nice to learn something new.

[Ralph]

A RM can be useful for frugal folks wanting to stay in their homes, and use some of their home equity for living expenses, like any other investment one has, but it seems to me it will just postpone the inevitable in their situation. Like trying to borrow themselves out of debt.

[verticaldoug]

Originally Posted by Chris

I can't provide much in terms of financial advise but behaviorally I know that people resist change until where they are at is currently more uncomfortable than the change needed. If they can enlist people to keep them in their comfort zone , they will do that rather than seek the solution. Good luck with your situation.

On behavior, it is actually a classic investment banker product- create a long life interest carry product which you can PV now. Get paid bonus now off projected future cash flow, be gone when the products all come due. In the future, resurrect yourself at another bank when products are bad, to help new bank work out of old problem. We called long life products IBGYBG. (I be gone, you be gone).

[dekindy]

Forget about fees. All you are interested in are results.

Go to immediateannuities.com and determine the principal amount needed to generate an income that will last them the rest of their life. Forget about keeping pace with inflation for now.

Compare that to the value of their home and see if the proceeds will be realistic to get the income they need.

Get several reverse mortgage quotes and compare to selling and purchasing an immediate annuity with the sale proceeds from their home.

Don't subsidize people that aren't willing to use the means at their disposal to help themselves. That is ridiculous unless of course you feel you owe it to them than that is something that only you can determine is appropriate.

Good luck.

[djg]

Originally Posted by pbarry

Ah, the B word. That will be a tough sell but the situation calls for extreme measures. I appreciate the candor.

^^ This is what I'm dealing with. Thanks for the list.

Like MattTuck I'm not a financial advisor and I'm in no position to endorse any particular course of action. I think he's right, however, that you need to lay out the various options for them, including the numbers. What the options mean is in the numbers, plus the process bits of course. There's the question what to do today to put out the fire, and there's the question how to plan for tomorrow. 165K is, from many points of view, a large sum of money. But if you take out a reverse mortgage (however you conceive or don't pay attention to fees, there's a certain net) or sell the house (less the transaction costs), and then pay off some substantial debt (whatever loans they have, whether from CCs or otherwise), you have what you have. Is there some sort of plan for making that work?

I'm also in no position to tell you what to do for a family member, or what not to do, and I wouldn't want to try. I appreciate that you have felt some responsibility here, and that you continue to feel a desire to help. Whether you should stop or cut back or double-down is not for me to say. But whatever you do, and whatever your income, expenditures, contributions, etc., and whether you are 25, 45, or 65, your own retirement planning is underway now, yes? Or in any case, you are building a foundation to whatever extent you are, independent of the question how much you are thinking about it or planning.

[verticaldoug]

I think your relatives are equating loss of the home as loss of independence. This is the hurdle to get over not depression era mentality.

As a general rule, the more complicated the financial product the more expensive it is in both upfront costs and hidden costs (bid-ask spreads, carry, hedges, more middle men etc). An outright sale and reinvestment of the proceeds in coupon paying conservative investments should yield a better return. Once you know the NET proceeds from what you can sell the home for (fee, taxes, payoff previous debt) speak to a financial consultant and see what he thinks you can generate as investment income with a conservative portfolio. Also be aggressive in claiming all tax exemptions from the sale. Your initial principal is so important here. If the cash flow + SS payments is not enough to live on going forward (rent, etc) then you really have to think of other alternatives. However, if the above method doesn't work, I really doubt reverse mortgages will work any better. Since the RM is a loan, and you have other debt, you will end up with a large negative carry on a monthly basis accruing to your home.

[Ahneida Ride]

Originally Posted by MattTuck

I don't know enough about reverse mortgages to give useful advice, but I'm generally suspicious of financial products. Banks aren't in the charity business, and your family member will end up paying one way or another.

They overbook 10 to one using the scheme they call "fractional reserve".
For ever frn deposited, they can create 9 frn by typing numbers into a
computer spreadsheet and then they collect interest on nothing.

10K deposited, 90K created outa thin air.
Eventually there are 100K in deposits but only 10K in the vault.
Overbooked 10 to 1.
A hotel with 10 rooms but booked for 100 guests.
The hope and prayer is that only at most 10 guests actually show up.

Image taken from Modern Money Mechanics, (fed resv of Chicago)

[pbarry]

Thanks for all the great advice and the tough love. Peter P, your experience is greatly appreciated.

My own retirement planning started late, but should work out fine as long as I don't facilitate situations like this.

One plus is the frugality of my kin. If we can find a solution, I'm not concerned about it being sabotaged by spending on non-essentials.

Using the calculator Dekindy provided, the sale of the home will not result in enough capital to provide a sufficient annuity, especially when rent is factored in.

So, we're down to a RM and possibly declaring bankruptcy. I'm talking to a few friends here today to get a recommendation for a local financial advisor. Time for a third party to look the books over and make a recommendation that will carry some weight.

[AngryScientist]

i dont know enough to add to the topic, but really wish you the best. taking care of people you love with investments of both time and money can be a tricky affair, it sounds like you're on the right track and hope this all works out for you and the whole family.

[josephr]

Originally Posted by fuzzalow

I have no interest or need for a RM, but thanks for a useful and coherent explanation. There's actually something to go on in your post and it is always nice to learn something new.

+1 --- always learn something new on Paceline!

my 78 year old mother is fortunate to have two SS incomes and lives frugally...but to live on $550 a month would require extensive creative budgeting and not quite sure she's got it all upstairs anymore anyway.

to OP --- not sure what all your options are...is there anyway to improve the monthly benefit from SS? Anything more than would be huge. Depression era mentality is hard to work with so just a note to say good luck!
Joe

[metalheart]

My Mom needed a lot of extra in home care that was beyond my means to help with near the end of her life. She would not move in with other family members and resisted all attempts at other solutions: she was going to stay home no matter what. A reverse mortgage was the only solution to providing the income needed to help her get the care she needed. As others have said, as long as they stay i the house after the reverse mortgage is acquired, then they do not have to worry about payback. Taking the funds as a lump or as a monthly draw for needed expenses is the decision they have to make based on their circumstances, In some situations the reverse mortgage is a viable solution to providing additional income for folks who are going to remain in their primary residence.