Is a Reverse Mortgage a viable planning tool?

[Winemaker]

A co w*rker of mine 20 years ago had 2 beachfront condos in/near Destin FL that he rented out all the time. He had a property management group, but him and his wife had no kids. He helped me initially when I started real estate investing, and his plan was to retire, liv in one of them, continue to collect rents on one of them, then put a RM on his other condo and his house up here, snowbird or rent it out. Sounded like a plan, don't know if he ever enacted it, as I went on to other job assignments in the company.

 

[foxfirev5]

I guess I'm lucky (from another thread) but I see no merit in mixing worlds between the roof over my head and investments. Think back to our ancestors and how this situation was positioned. Ownership vs company towns etc.

 

[Perryinva]

Before I would RM, I would refi and extract as much as I could such that the extracted cash would pay the new mortgage for my lifetime and then some. My FIL got a 30 year mortgage on his final condo in Ft Lauderdale at 80, with 5% down and paid PMI. It was only a $150k condo, so a small mortgage and he spent it on whatever he wanted. He died at 89 in 2012 and it was still underwater then so we let the bank take it. He gambled that it might be worth something to his kids later, but instead they split the couple hundred K that was still left from the invested proceeds of the house he sold when he decided to go maintenance free single level. I calculated the estate was still quite a bit ahead vs had he bought it for cash and we sold it at the going market.

I have always been relatively lucky in home appreciation, but would never gamble on a value that far in advance for a RM.

 

[Markola]

Before I would RM, I would refi and extract as much as I could such that the extracted cash would pay the new mortgage for my lifetime and then some. My FIL got a 30 year mortgage on his final condo in Ft Lauderdale at 80, with 5% down and paid PMI. It was only a $150k condo, so a small mortgage and he spent it on whatever he wanted. He died at 89 in 2012 and it was still underwater then so we let the bank take it. He gambled that it might be worth something to his kids later, but instead they split the couple hundred K that was still left from the invested proceeds of the house he sold when he decided to go maintenance free single level. I calculated the estate was still quite a bit ahead vs had he bought it for cash and we sold it at the going market.

I have always been relatively lucky in home appreciation, but would never gamble on a value that far in advance for a RM.

Interesting strategy, which I hadn’t considered, because I assumed banks would not sell a 30 year mortgage to an 80 year old. Really, what your FIL did, may he rest in peace, sounds like a more flexible and transparent reverse mortgage variant in that, in both scenarios, the bank ends up with the house. However, in your FIL’s model, the owner’s hands aren’t tied regarding what he/she can do with it during life, as with a RM. For example, with a RM one can’t rent the place out, and many other strings. It also sounds easier on the executors to simply give the condo to the bank rather than deal with selling it themselves. Makes sense to me. Any other upsides or downsides to your FIL’s decision?

 

[rayvt]

I assumed banks would not sell a 30 year mortgage to an 80 year old.

Why not? They make 30 year mortgages to 70 year olds all the time. And they know that most of them will not make it to 100.

 

[geeky_grrl]

Why not? They make 30 year mortgages to 70 year olds all the time. And they know that most of them will not make it to 100.

Age discrimination in lending is illegal in the US under the Fair Lending Act. https://www.occ.treas.gov/topics/co...otection/fair-lending/index-fair-lending.html

Other countries have different rules; I've seen news stories about people in their 40s having a hard time getting mortgages in the UK since the mortgage was longer than their expected remaining time in the workforce.

 

[FANOFJESUS]

It think I would buy a small house somewhere or rent a small apartment. A Reverse Mortgage does not seem worth it. If you moved to the Midwest you could buy a house and take out more than 250k Maybe as much as 450k

 

[Katsmeow]

I disagree that reverse mortgages are always a bad idea. It depends on the situation. As I recall Wade Pfau was suggested using reverse mortgages as part of a retirement plan. He indicated that using a reverse mortgage earlier in retirement actually works out better financially than doing at the last moment.

https://retirementresearcher.com/using-reverse-mortgages-responsible-retirement-income-plan/

It has been awhile since I read the article so I don't know if he has written anything newer about it.

 

[Badger]

Well, I like to keep things simple and understandable, so these recent comments above about hidden this or that or scammy infomercials are enough to put me off. I don’t have cable so I haven’t seen Tom Selek’s sales job.

I haven't had cable for a couple of decades now. I have an antennae for the local stations and Tom is on there selling RM constantly throughout the day. Some of the commercials are older and some more recent as can be seen getting "long in the tooth". Maybe the commercials are more frequent here in Florida due to the high percentage of retired folks.



Cheers!

 

[Markola]

I disagree that reverse mortgages are always a bad idea. It depends on the situation. As I recall Wade Pfau was suggested using reverse mortgages as part of a retirement plan. He indicated that using a reverse mortgage earlier in retirement actually works out better financially than doing at the last moment.



https://retirementresearcher.com/using-reverse-mortgages-responsible-retirement-income-plan/



It has been awhile since I read the article so I don't know if he has written anything newer about it.

Age discrimination in lending is illegal in the US under the Fair Lending Act. https://www.occ.treas.gov/topics/co...otection/fair-lending/index-fair-lending.html



Other countries have different rules; I've seen news stories about people in their 40s having a hard time getting mortgages in the UK since the mortgage was longer than their expected remaining time in the workforce.

Thanks for the articles.

 

[meleana]

A friend of mine sold her home in another state and took out something called a “reverse mortgage for purchase“ to buy a new home. I had never heard of this product but she is happy with it.

She had to put down a big down payment and that’s all. No payments for life. She banked the rest of the money she hit from the sake of her other house.


She is 70 and single no children.

 

[samcat]

I think if you are cash poor and have lots of equity in your house, a reverse mortgage can be a good way to go. A friend of mine took one out. She had tons of equity, low property taxes and not a lot of current income. The reverse mortgage changed her life.

There are high fees, etc., but in some cases, it is the right decision.

 

[Badger]

A friend of mine sold her home in another state and took out something called a “reverse mortgage for purchase“ to buy a new home. I had never heard of this product but she is happy with it.

She had to put down a big down payment and that’s all. No payments for life. She banked the rest of the money she hit from the sake of her other house.


She is 70 and single no children.

How does that work for her taxes when she banks some of the money instead of putting it into another house?

 

[Davidz247]

Reverse Mortgage Purchase

I just sold my house in CA and am planning to purchase a home in florida with a RM. 600K purchase, 80% RM, so I have a nice house ,no payments for 120K...sounds good to me. let the bank worry about appreciation and future equity.

 

[Koolau]

I just sold my house in CA and am planning to purchase a home in florida with a RM. 600K purchase, 80% RM, so I have a nice house ,no payments for 120K...sounds good to me. let the bank worry about appreciation and future equity.

I have always assumed the bank HAS already worried about the appreciation and equity. They've probably built that into their fees, etc. Not saying the bank could not eventually take a bath, but usually, they would factor in a near worst-case situation so that they will not loose very often. Again, not an expert, but I assume that in some fashion, you will be paying for the bank's potential down-side risk. YMMV

 

[Sunset]

How does that work for her taxes when she banks some of the money instead of putting it into another house?

You don't need to buy another house with the money.
The taxable exclusion of $250K per person ($500K per couple) is based on the sale of your home, and not what you do with the money after the sale.

 

[Badger]

You don't need to buy another house with the money.
The taxable exclusion of $250K per person ($500K per couple) is based on the sale of your home, and not what you do with the money after the sale.

Thank you
What if there is more money remaining after the exclusion is taken? I thought that if after the basis and cost of improvements are subtracted and the exclusion is taken then the money remaining would be taxed unless it is used to purchase another house. Not considering selling my house but I would hate to get this wrong if I did. Tax codes change so often.



Cheers!

 

[RunningBum]

Thank you
What if there is more money remaining after the exclusion is taken? I thought that if after the basis and cost of improvements are subtracted and the exclusion is taken then the money remaining would be taxed unless it is used to purchase another house. Not considering selling my house but I would hate to get this wrong if I did. Tax codes change so often.

Nope, cap gains are paid after the exclusion. The old law had no exclusion but you could avoid/defer the cap gain by buying a new house of equal or greater value. In this case, the change was made 23 years ago.

 

[Markola]

I just sold my house in CA and am planning to purchase a home in florida with a RM. 600K purchase, 80% RM, so I have a nice house ,no payments for 120K...sounds good to me. let the bank worry about appreciation and future equity.

OP here. Wow, so you effectively kept the balance from your CA sale to use however you like and bought a new $600k house in FL for $120K?

This is the kind of creative RM example I was seeking to learn about as a what-if and a way to activate some otherwise inert home equity in certain situations.

 

[sengsational]

How does the math compare to putting $120K down paymentans getting a $480K loan? Now you have a portfolio to live off of. I don't get why anyone would do a reverse mortgage in this scenario. You buy a house for cash, then you set up a complicated way to get cash over time, when you already have what you want... cash!

 

[Cricky]

How does the math compare to putting $120K down paymentans getting a $480K loan? Now you have a portfolio to live off of. I don't get why anyone would do a reverse mortgage in this scenario. You buy a house for cash, then you set up a complicated way to get cash over time, when you already have what you want... cash!

There’s no “getting cash over time.” Reverse mortgages for purchase work like a lump sum reverse mortgage, you make the down payment and the rest of the purchase cost is financed by the RM. You don’t need to make payments, but you should expect the growth of the RM to eat away your equity from the down payment.

That said, Davidz247’s example doesn’t make sense to me. Unless he’s maybe 120 years old? Here is HUD’s principal limit factor table; no one is making 80% reverse mortgages under this program. I’d be very curious how he ccould get an 80% mortgage—maybe a private loan of some kind?

https://www.hud.gov/sites/dfiles/SFH/documents/PLF_on_after_10_2_17.xls

 

[RockLife]

WADR IMO it is silly to even think about precision planning that far out. There are so many things that can happen to you, your health, your house, your city, your neighborhood, to interest rates, to inflation, .... that you might as well consult the magic 8-ball. The answer will be equivalent quality to any other answer you might get.

With regard to predicting the appreciation rate of your house for the next 30 years, remember Taleb's turkey: https://www.businessinsider.com/nassim-talebs-black-swan-thanksgiving-turkey-2014-11

Love that piece about the turkey. Poor turkey. But it reinforces my belief that you really need to plan for the future, while simultaneously living for today. It's a tightrope, but you must walk it. Now as I age (I turned 60 today), I am leaning more and more toward living for today, because as much as we don't want to think about it, tomorrow isn't promised. Just ask the turkey.

RG

 

[Sunset]

I just sold my house in CA and am planning to purchase a home in florida with a RM. 600K purchase, 80% RM, so I have a nice house ,no payments for 120K...sounds good to me. let the bank worry about appreciation and future equity.

I'm wondering if a person can end up stuck and lose the entire $120K by having to move in a few years ?

 

[HI Bill]

I'm wondering if a person can end up stuck and lose the entire $120K by having to move in a few years ?

I found this online: "The property is sold or title to the property is transferred. If the home is sold or title transferred, the loan becomes due and payable. Generally, if the property is sold, the escrow company will accept the purchaser's money and pay off the reverse mortgage along with any other liens on the property."

If on the other hand, they failed to maintain insurance or pay property taxes, the lender could foreclose. If foreclosed upon, I think that the house's occupant would get back what they put in, less interest and lender costs to date, but that might not be accurate, depending on the contract. I've watched RM stories on TV where RM holders lost their properties (and income streams) due to non-payment of HOA dues, property taxes, or insurance. This is especially easy to have happen when someone's older and their mental acuity isn't adequate to keep up.

My other concern would the the Medicaid look-back period, and the lack of the ability to use the house value to pay for long term care. There would likely be no house to tap in the event the person needed long term care, and didn't want to accept what Medicaid would pay for.

 

[Tracer]

A friend of mine depleted all his savings, sold his coin collection and anything else of value he had just to get by. He is living on SS and food stamps. All he had left was his house so he obtained a RM. He has no heirs so the company will just take ownership of the house when he dies. As a last resort, for him this move may have made sense. This gave him some income that he sorely needed. For most anyone else, these expensive loans don't make much sense at all IMO.