Reverse Mortgage

[RobLJ]

I and DW are still in our 50's so this is more in the category of idle curiosity/long-term planning.

1) But have any of you done a reverse mortagage/line of credit, to access, for example for emergencies, to pull rather than selling stock in a severe downturn, or to reduce the cash component of your allocation?

2) Would a Heloc be as appropriate or more advantageous?

I'm curious; this is just an option I have considered longer term.

 

[frank]

From what I can glean from reverse mortgages, they may get you some money, but in the long term the writer of the mortgage is the big winner.

 

[braumeister]

Lots of folks find a HELOC very useful, but a reverse mortgage would only be a last resort IMHO.

 

[jazz4cash]

I think the concept of a reverse mortgage is ok, but the fees are so high that it would be a last resort at best to me. If the need is primarily access for emergencies, a Heloc is a much better (practically free) solution.

 

[fosterscik]

It seems to me you are comparing apples to oranges. A HELOC is only useful as a short term source of bridging funds. You have to have other funds coming in or other assets to make the loan payments or you will lose your house.

A reverse mortgage guarantees you will "lose" you house - either when you and your spouse die or when you sell and chose to settle up your account. You do not need to make any repayment of the loan until that end game arrives and so face no danger in losing your residence until that, hopefully, far in the future date.

IMHO opinion they are very different and I would only need one under very different circumstances: I have a short term cash flow problem (I want to buffer against a market drop and don't want to sell undervalued shares) OR a long term "I can't afford to live without tapping home equity" long term problem.

 

[euro]

I and DW are still in our 50's so this is more in the category of idle curiosity/long-term planning.

1) But have any of you done a reverse mortagage/line of credit, to access, for example for emergencies, to pull rather than selling stock in a severe downturn, or to reduce the cash component of your allocation?

2) Would a Heloc be as appropriate or more advantageous?

I'm curious; this is just an option I have considered longer term.

Yes, my HELOC constitutes essentially all of my "cash reserves".

 

[euro]

It seems to me you are comparing apples to oranges. A HELOC is only useful as a short term source of bridging funds. You have to have other funds coming in or other assets to make the loan payments or you will lose your house.

Well, yes and no. If you take, say, half of your HELOC to cover short term expenses, you can use the other half to pay the interest for quite a while. That said, yes, eventually, the piper has to be paid.

 

[FiveDriver]

In my experience, Reverse Mortgages are skewed in favor of the Lender from the very start of the process. The Appraiser is encouraged to "come in low" on his Estimate of Value. This is the exact opposite of every other Lending scenario where the Loan Arranger wants the Subject overvalued in order to hide his Fee in the proceeds. When the Reverse Mortgage is paid out at pennies on the dollar.....that house belongs to the Lender, and he will have no compunction about turning the Homeowner out.

Reverse Mortgages should be a last resort.

A HELOC may be a better alternative. But consider that if you have an open line of credit today -- that could be cancelled if Market Conditions change. When you most need that money....the Lender may pull the Loan.

Any of your Credit Cards will give access to an Interest-free Loan for up to 7 weeks if you play the Billing Cycle right. The purpose of a separate Emergency Fund is to cover those unforeseen expenses that can extend beyond the short term. You don't want to be one of the many who can not cover even minor repairs to house or car.

 

[Chris7]

Our HELOC was frozen during the housing crisis. So getting one now does not guarantee you will have access to it down the road.

:O)

 

[Ally]

My mom had Alzheimer's and my parents had a home worth about $450,000, and had used much of their savings on her care. They chose for her to stay home with privately hired care provider help. In order to go so, they got a reverse mortgage for about $200,000. She was able to stay home till she died and then my dad stayed home till he died 4 years later. They gave us 9 months to sell the home or buy it at what was owed. I wasn't the executor, and don't know what all the fees were, but when we sold it, we still had a healthy profit to split. So in our case, I'm glad they did it, so they could stay in their home with the care providers they knew and liked. None of us really cared what we inherited, as long as they were comfortable and happy. I realized the fees may be too high, but in some cases, they serve a purpose.

 

[Teacher Terry]

One of the dangers of reverse mortgages is that if both people are out of the home for 3 months they can force the sale. So say both people end up in a rehab facility but are expected to go home but it takes longer then 3 months the house will be gone. Also if one person dies the remaining one can't be out of the home for more then 3 months. OUr home was paid off but recently we decided to take 100k out in a 30 year mortgage since rates are so low. We are only paying 421/month so there is no point at which we can't afford this. Now we have the extra $ in case we need it. If $ was ever really tight we would sell the house and buy a condoeE still have a ton of equity in our home.

 

[Jerry1]

There may be a good reason for a reverse mortgage, but when I see a paid spokesperson like Henry Winkler, Fred Thompson and now Tom Selleck, I big red flag goes up. I get the same feeling when I see celebrities talking about gold in your IRA. I would stick with the HELOC or try to get a 30 year mortgage before retirement.

 

[Teacher Terry]

We got the mortgage with both of us being retired with no problem.

 

[ShokWaveRider]

VERY VERY bad Financial Decision. Highest Interest Rates and Fees of any Loan, Yes it is a loan. Shame on Fonzi and Manum, as if you need one!

 

[foxfirev5]

Our HELOC was frozen during the housing crisis. So getting one now does not guarantee you will have access to it down the road.

:O)

Yeah, we ran into that one also. We had opened a HELOC while building our lakehouse to help with cash flow. Paid it off before the project was complete. In 2005 we bought a lot to build a spec house and lucked out by taking a profit early.
Then in late '08 the bank lowered our limit which had no impact, since we had no balance. Probably nothing more than to make them look better. However it was enlightening. I won't get fooled again.

 

[RobLJ]

Response

Thanks for the thoughts--one concern of the HELOC route was exactly what several pointed out, namely that this line of credit could be revoked at precisely the point when one wants to access it, as in 2009.

I'm aware of the high fees for reverse mortgages, which is undoubtedly an key issue. On the other hand, keeping the house as a legacy for the two sons is not necessarily a priority. I do view it as a final turmp card, however.

 

[JillPill]

One of the dangers of reverse mortgages is that if both people are out of the home for 3 months they can force the sale. So say both people end up in a rehab facility but are expected to go home but it takes longer then 3 months the house will be gone. Also if one person dies the remaining one can't be out of the home for more then 3 months. OUr home was paid off but recently we decided to take 100k out in a 30 year mortgage since rates are so low. We are only paying 421/month so there is no point at which we can't afford this. Now we have the extra $ in case we need it. If $ was ever really tight we would sell the house and buy a condoeE still have a ton of equity in our home.

Hi Teacher Terry - I'm a housing counselor certified to conduct the required counseling for people obtaining a federally backed (HECM) reverse mortgage. Residency in the home is required during the term of the reverse mortgage. Meaning, it has to be your primary residence (you can't get one on a vacation home for instance). That means you must live there 6 months out of the year. If you left permanently to say move in with a child or permanently into the vacation home -the loan would come due. The loan will not go into default if the mortgagors (homeowners) are not in the home for 3 months. If for instance one homeowner died and the other homeowner was in a nursing home for more than 12 consecutive months - the loan would then come due. It essentially comes due when both homeowners are physically, permanently gone from the home.

JillPill

 

[JillPill]

Thanks for the thoughts--one concern of the HELOC route was exactly what several pointed out, namely that this line of credit could be revoked at precisely the point when one wants to access it, as in 2009.

I'm aware of the high fees for reverse mortgages, which is undoubtedly an key issue. On the other hand, keeping the house as a legacy for the two sons is not necessarily a priority. I do view it as a final turmp card, however.

Hi Rob -as noted above in my response to Teacher Terry - I'm a housing counselor who conducts the required counseling for people seeking the federally backed (HECM) reverse mortgage product (I believe at this time they are the only reverse mortgages on the marketplace).
The biggest downside for most people is the fact that the money that they borrow under a HECM is compiling interest and will possibly wipe out any equity left in the home on their death that would have gone to children.
The fees have been reduced for some homeowners by a rule change made about 3 years ago by HUD. Outside of normal closing costs for any mortgage closing (attorney fee, inspection and appraisal fee, title insurance and recording fees) the govt allows the lender to charge an origination fee that ranges between 2500 and 6000 (based on the value of the home - if the home is worth 400K or more the 6000 origination fee can be charged). This fee is negotiable and many lenders lower it or waive it altogether. Lenders typically did not waive or lower this 6-7 years ago - now they are more likely to - they seem to be more competitive than they once were.
The other large fee is the mortgage insurance to the govt. That is either 1.) 1/2 of 1 percent of the value of the home where little money is *required* to be borrowed (meaning an existing mortgage has to be paid off) or 2. 2.50% of the value of the home if there is a large mortgage balance to be paid off.

If you are a homeowner with no mortgage (or a mortgage with a small balance) to be paid off your closing costs are much smaller than they were before the rule change (when everyone paid 2% of the house value).

You can set up a creditline rather than have monthly payments made from the lender. Any money you don't use in the creditline grows at the interest rate of the loan. Any money taken on the loan is not income and is not taxable.

They are not for everyone certainly but can be an interesting option.

JillPill