Reverse Mortgages

legion · 11-17-2007, 07:58 AM

I've seen a lot of TV adds for these lately. What are they? A bank slowly buys a paid-off house back from the owners?

Seems like there are many potentials for abuse of the elderly here (people who mostly own their homes 100%):

1) The "price" they buy the house back at. I expect it to be low compared to the market, but high to the homeowners if they bought the house 30 or more years ago.

2) It seems that the commercials tend to encourage recipients of a reverse mortgage to spend, spend, spend. No mention of screwing your heirs out of their inheritance.

stomachmonkey · 11-17-2007, 08:09 AM

It's a way to get the equity out of your house without having to do a LOC or equity loan. LOC's and equity loans are ways to pull money using the asset as collateral but they must be repaid monthly at interest.

Reverse mortgage gives you monthly money that is deducted from the value of the house.

The loan gets paid back from the proceeds of sale if the owner dies or sells or if the heirs sell.

rvanderpyl · rvanderpyl's Garage

No comments except that Reverse Mortgages are meant for people whose main, or only asset of value is their house. They basicaly get a guaranteed payment for X months with the ability to continue to live in their house until they either choose to sell, or die. In a lot of cases they can even still live there if the money has all been paid out.

Quote:

Originally Posted by legion

No mention of screwing your heirs out of their inheritance.

As for that comment, as far as I am concerned the only people who DESERVE any money from a persons lifetime effort, is that person. If they choose to leave something to their heirs, great, if they don't that is fine as well. If by it you mean the heairs are being screwed by the company doing the reverse mortgage, well I guess there are always shady companies in any industry, but mostly it's just as legitimate a business as any type of loan. You need to be aware of what you are getting into.

Moneyguy1 · 11-17-2007, 10:55 AM

A word of warning.....If the individual goes into a nursing facility for (30 days if I recall accurately...it has been a long time since I worked on one of these cases) then the house MUST be put on the market. I had one individual who would not listen and wound up dying in the County Home virtually penniless.

tc-sacto · 11-17-2007, 06:04 PM

Quote:

Originally Posted by Moneyguy1

A word of warning.....If the individual goes into a nursing facility for (30 days if I recall accurately...it has been a long time since I worked on one of these cases) then the house MUST be put on the market. I had one individual who would not listen and wound up dying in the County Home virtually penniless.

Correct as I understand it. However it should be noted that you don't have to sell the house until you or the LAST Survivnig borrower no longer occupy the property for at least 12 months.

Also, you only pay back the loan amount or the market value of the home, which ever is less.

You can receive the funds as a lump sum, monthly income, or 1st mortgage pay off...if small enough.

Probably the best way to take the loan is with a "period certain payout..ie 10yrs vs lifetime payout. This limits the amount borrowed, and you get a higher monthly income and can always do another Reverse mortgage in 10 years if the house has continued to go up in value.

It really can be a viable planning tool. Best for people over age 70 with little other assets.(imho)

stomachmonkey · 11-18-2007, 05:13 AM

Quote:

Originally Posted by tc-sacto

It really can be a viable planning tool. Best for people over age 70 with little other assets.(imho)

Yeah,

Wish my father had been more communicative re his financial needs.

At 70 and in poor health he floated a 2nd w/out mortality ins and passed away 2 years later so now I have a huge nut on the house and can't get it sold in todays market.

Had he done a reverse the financial situation would have been drastically different.

The exposure would easily have been a 1/4 of what it actually is today.

svandamme · svandamme's Garage

Quote:

Originally Posted by Moneyguy1

dying virtually penniless.

is death more fun if you die with millions in the bank?

Moneyguy1 · 11-18-2007, 06:52 AM

Stijn...

At least it is more comfortable. Like I said, this individual dies in a County Home.

svandamme · svandamme's Garage

well ya, i'm just saying it's no problem to die pennyless, just as long as you spend that last penny at the last moment...

Moneyguy1 · 11-18-2007, 11:48 AM

Back to the concept that "Timing is Everything"!!

If we could only accurately time our own natural demise.

Tishabet · 11-19-2007, 04:42 AM

In response to a reverse mortgage "screwing your heirs out of their inheritance," Virgin Money has a product aimed at enabling families (typically the children of elderly parents) to fund the reverse mortgage themselves... no bank involved. The home (often the childhood home of the people funding the mortgage) stays in the family.

http://www.virginmoneyus.com/RealEstateLoans/RetirementMortgage/tabid/85/Default.aspx

Moses · 11-19-2007, 05:59 AM

One potential problem with reverse mortgages is that the home owner will never benefit from any increases in the property value after the reverse mortgage is established.

Moneyguy1 · 11-19-2007, 05:38 PM

Better yet.....

Sell your paid-off house to your children and hold the mortgage. They pay you a mortgage payment each month, you pay them rent. However, the rent is less than the mortgage payment, a net gain every month for Mom and Pop.. It would appear that the children would be losing money, right? Not necessarily. As landlords, they get all the benefits of being able to deduct the maintenance, taxes, insurance, etc. Result: Mom and Pop get additional income, the kids get tax write-offs and when Mom and Pop go to their reward, the mortgage is forgiven and the kids have the house free and clear. Everyone wins.

RickM · RickM's Garage

Quote:

Originally Posted by Moses

One potential problem with reverse mortgages is that the home owner will never benefit from any increases in the property value after the reverse mortgage is established.

But if the house appreciates during the loan's lifespan why would the homeowner not benefit? Would they not sell the house, realize the gain and repay the reverse loan?

Also, I believe there are pretty rigorous fed regulations governing the reverse mortgage programs, specifically to protect the typical (elderly) customer.

Dottore · 11-19-2007, 07:56 PM

Quote:

Originally Posted by svandamme

well ya, i'm just saying it's no problem to die pennyless, just as long as you spend that last penny at the last moment...

You can do even better than that: run up credit cards and bounce a few checks just before you depart.

berettafan · 11-19-2007, 08:36 PM

they encourage piss poor planning, have high fees and will do more to eliminate the build up of family wealth than the estate tax people get so pissed about.

why not just sell your house, take the cash and rent somewhere?

i don't think reverse mtgs will be around in 10yrs.

tc-sacto · 11-19-2007, 08:50 PM

Quote:

Originally Posted by Moses

One potential problem with reverse mortgages is that the home owner will never benefit from any increases in the property value after the reverse mortgage is established.

1st) This is just not true.

2nd) "they encourage piss poor planning, have high fees and will do more to eliminate the build up of family wealth than the estate tax people get so pissed about.

why not just sell your house, take the cash and rent somewhere?

i don't think reverse mtgs will be around in 10yrs."

Just the oposite. Since the FHA steped in with new regulations a few years ago. the plans have become much more effecitve for planning. The Reverse Mortgage will become as common place as a 30 year morgage.

Reverse mortgages are not good for depressed areas with little capital appreciation potential. You would only destroy family wealth if the property couldn't appreciate as fast as the loan compounded.

Like any tool it works best when used approprately. However, I know for some financial sales people when all you have is a hammer everthing looks like a nail.

berettafan · 11-19-2007, 09:03 PM

Quote:

Originally Posted by tc-sacto

Reverse mortgages are not good for depressed areas with little capital appreciation potential. You would only destroy family wealth if the property couldn't appreciate as fast as the loan compounded.

this would seem to support my statement and be in conflict with the rest of your post. can you explain?

btw, the US r/e market is a 'depressed area with little capital appreciation potential'. and i agree, family wealth is being destroyed by reverse mtgs.

tc-sacto · 11-19-2007, 09:33 PM

BerettaFan.
Sure. For the most part, a reverse mortgage would not make any sense for a home in a city like Rapid City South Dakota.(assuming the home owner has a goal of passing on the home to heirs. If not then a RM may be fine)

For a blue collar couple who bought a home in San Jose California in 1975 a RM may be a very good tool. Assuming they want to stay in the home. Joint life expectancy is around 20 years for a 70 year old couple. Thats plenty of time for future appreciation to out pace the interest cost. (Which, historically, has a fairly good probability to do)

So the parents get money to live on, get to stay in their home(assuming that's important to them) and can still pass on an asset with equtiy to the children.

Again not right for everyone, but can be a useful tool.

as a side note:
Aprox cost to set up the RM about 5% of prop value.(Real Estate brokers commission to sell the home about 5%)

Regarding RM vs Estate Tax. At least the home owners got to spend the equity vs. the government getting more taxes to squander. ;0)