Reverse Mortgages...How do they work?

[Redbugdave]

Lately on TV, I have noticed a lot of ads on reverse mortgages. Just how do they work and what's the catch? I don't know anything about them, and was just wondering...

 

[Ronnieboy]

Lately on TV, I have noticed a lot of ads on reverse mortgages. Just how do they work and what's the catch? I don't know anything about them, and was just wondering...

I've never had one, but from what I understand a bank will appraise your house, say it is worth $500k, then they will give you a mortgage for 80% of that = $400k.
Assuming the house is totally paid off, you can get that $400k in a lump sum or paid out monthly or annually over time to equal that same amount.

Then when you and your spouse croak, the bank gets the house. As long as you and your SO are alive you get to live the house even if it is another 30 years and the $400k gets paid out in 15. From what I have heard, you can even pay it off if you have second thoughts and want to leave the house to the younglings. But this all from hearsay and some reading in financial magazines.

 

[obgyn65]

Hello - you may find this thread interesting http://www.early-retirement.org/forums/f28/reverse-mortgages-17380.html

I would use a reverse mortgage as a last resort.

 

[Aeowyn]

If you're hearing it on late night cable TV, then it's probably a bad deal....

From what I understand about reverse mortgages, there riddled with fees and some are down right scams that feed off the elderly.

Be ware.

 

[Htown Harry]

...some are down right scams that feed off the elderly.

Beware.

Beware indeed
FIN-2010-A004
Subject: Advisory to Financial Institutions on Filing Suspicious Activity Reports Regarding Home Equity Conversion Mortgage Fraud Schemes

 

[skyvue]

They usually are discussed when somebody has most of their remaining assets tied up in their primary residence.

They seem like a viable option in some cases when people out live their retirement savings and want the income stream to boost their Social Security and/or pension.

However, I am not sure why you couldn't sell your home outright, pocket the cash, and just rent a place instead? It would seem like the same basic result. I guess perhaps some people are emotionally attached to their home and can't deal with "renting" late in life or leaving the homestead.

If you have children, I would think selling the home to one of your children at a sharp discount, then paying them a reasonable amount in "rent" until you die would be another option. Of course, this would only be something you would do if your child was set financially and would not be burdened by the 2nd home.

 

[FIREd]

My MIL set up a reverse mortgage last year. She liked her house, didn't want to sell it, and didn't want to rent. DW and I didn't want to buy her house and rent it out to her (we felt that becoming MIL's landlord could easily turn into a nightmare for us). She needed more income and her house was her last untapped asset. A reversed mortgage seemed like a reasonable option. Ronnieboy gave a good description of how a reverse mortgage works. I advise anyone considering a reverse mortgage to educate themselves and shop around before jumping in. Fees and terms can vary greatly from one bank to the next. By law, MIL was required to meet with an independent counselor during the application process. The counselor's job was to make sure that a reverse mortgage was appropriate for her and that she understood the limitations. Aside from the counseling session, shopping for a reverse mortgage was surprisingly no different than shopping for a regular mortgage.

 

[Dimsumkid]

I think these conditions cause a lot of reverse mortgages to be problem:

Your reverse mortgage loan becomes due when one or more of the following conditions occur:
(a) The last surviving borrower passes away or sells the home
(b) All borrowers permanently move out of the home
(c) The last surviving borrower fails to live in the home for 12 consecutive months due to physical or mental illness
(d) You fail to pay property taxes or insurance
(e) You let the property deteriorate, beyond what is considered reasonable wear and tear, and do not correct the problems

When the loan becomes due, the reverse mortgage principal advanced, interest charges, and service fees (including closing costs) are paid in full from the sale of the house or other assets of the estate. Whatever is left over from the sale of the home goes to the owner or estate.

 

[Ally]

There are some cases where it does help. My mom got Alzheimers and my dad used up all their savings keeping her at home with help from caregivers. Then she died and he needed caregivers for the 4 years he outlived her. So he also needed that money to fund the caregivers. Now my brothers and I are getting the house painted and ready to sell, and we may get a little bit out of it. However, even if we don't, it was worth not having any inheritance, just to know they were happy at home with their pets and had excellent care. It would have been mentally too much for them to move out and sell the home, since it was 4000 square feet of tons of possesions from travel, artwork, collections of various items. It would have really upset them. Now we are dealing with it, which is fine.

 

[youbet]

DW and her siblings helped their mom get a reverse mortgage and it's working out very well. Her arrangement is that she can write checks against an account as needed.

As with everything there was good news and bad news. The bad news is that even with careful study and shopping, fees and expenses for the reverse mortgage are high and make it a relatively expensive loan. The good news is that mom now has money to live in her own condo where's she's been for over a decade and which she likes very much. Moving to a new apartment at 83 yo would have been a hassle for her. And, importantly, this arrangement gets her money at arms length from her kids. So no siblings worried that they're getting screwed by being the one to buy and rent her back the condo or some other scheme. Even if the extra fees and expenses grow to several thousand dollars over cheaper alternatives to get mom the cash, it will be worth it. Don't need siblings concerned over who's paying what, who's benefitting from what, etc.

If the home an elederly person is in is appropriate for them and the money from a reverse mortgage allows them to stay, I recommend it. But, as mentioned, study and shop carefully.

 

[wishing4it]

Actually, I've looked into this recently for my two brothers who live in a house left to them by my mother. They have only SS as income and can't afford the taxes and insurance but really don't want to move. The Reverse Mortgage will give them income for the rest of there lives... enough to pay the taxes, ins, upkeep, and then some. If the house was sold outright, they would have to pay rent that would be more than double the taxes, ins, and upkeep. For them, this is the only way to insure they won't run out of money. Reverse Mortgages are pricey but rates are at their lowest levels right now. If needed, the loan can be re-evaluated later on down the line to access any additional equity that may be available. As long as you know you may not have anything to leave heirs. Read up on them and as someone said, counseling is required to ensure you know what you're getting into.

 

[haha]

Actually, I've looked into this recently for my two brothers who live in a house left to them by my mother. They have only SS as income and can't afford the taxes and insurance but really don't want to move. The Reverse Mortgage will give them income for the rest of there lives... enough to pay the taxes, ins, upkeep, and then some. If the house was sold outright, they would have to pay rent that would be more than double the taxes, ins, and upkeep. For them, this is the only way to insure they won't run out of money. Reverse Mortgages are pricey but rates are at their lowest levels right now. If needed, the loan can be re-evaluated later on down the line to access any additional equity that may be available. As long as you know you may not have anything to leave heirs. Read up on them and as someone said, counseling is required to ensure you know what you're getting into.

I know an older woman who has a big expensive house that is in a very slow market, and she has little cash flow. She got a reverse mortgage, and it has really improved her lifestyle. I know essentially nothing about the details, only that she now has money to spend.

Ha

 

[Redbugdave]

Some very interesting angles on the reverse mortgages. For many people like us that have things paid off, aren't too worried about the heirs, that sounds like an interesting option. It's good to know about these different options.

What happens if you have to leave your home into an assisted living or a nursing home? The bank takes the home and the loan is assumed?

 

[Dimsumkid]

Some very interesting angles on the reverse mortgages. For many people like us that have things paid off, aren't too worried about the heirs, that sounds like an interesting option. It's good to know about these different options.

What happens if you have to leave your home to to into assisted living or a nursing home? The bank takes the home and the loan is assumed?

If you read my prior post, option c, the way I understand it after you're out 12 months straight and the full payment on the mortgage is due.

 

[Redbugdave]

Thanks Dimsum! It did not soak in the first time. I think the average stay in a nursing home I had read is about 2 years or less, (death). Some interesting angles...possibly affecting LTC insurance, too.

 

[Khan]

Mother once mentioned that they had reverse mortgage; don't know any details.

 

[Htown Harry]

Here's a Journal of Financial Planning article on tax deductions for interest payments associated with reverse mortgages.

It's very dense, but it appears to be comprehensive:

The Taxation of Reverse Mortgages