Is the Reverse Mortgage a good idea?

Hey Mis ..... it's called a reverse mortgage because instead of payments being made ...... it provides an income because the bank would be giving your parents a monthly check. The amount is arrived at ...according to their age and the value of the property, and any outstanding loans against the home. Your parents do NOT make monthly payments as with a regular mortgage.

You say that your parents were asked to help out relatives? Eeek. I'm not sure it's a good idea to use this kind of mortgage for that.

I don't have much time. Gotta get to bed soon ... but google a reverse mortgage and you should find tons of information.

Pros and Cons ..... make sure if they decide to do this, that you and they understand fully the ins and outs.

Email me if you have any questions. Dev and Izz both have my email addy.

http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

Some info ... straight from Hud.

G'nite

mismi, From the top of my head, a guess at best, I would say it's not a good idea. Since I've never looked into a reverse mortgage, I'm not informed enough to give you any advise, but it would be a good idea to really do your homework before making any recommendations. Balance all the pros and cons, and provide that info to your parents.

Just a word of warning; when banks provides a reverse mortgage, it's because it's lucrative them them to do so over making "real" loans. You need to find out if the fees and interest the bank charges for the reverse mortgage is "reasonable" when compared to what they charge on a regular mortgage loan.

Balance this against the market value of the home or potential market value after this government recovery program takes effect. A decision shouldn't have to be made immediately.

Good luck.

Thank Brooke and C.I. - I am reading the links and Googling. My feelings are the same - against it - even moreso now. I appreciate your input!

On the other hand....

For some people it might be a good idea.

If a person is childless and/or doesn't have family whose life would substantially change by receiving your home as an inheritance, it could be a way to make your later years much more comfortable.

You die, the house goes to the bank, that's all folks.

It's a great thing for a lot of seniors, Chai. Many need income more than equity. What good is it to sit there in a bought-and-paid-for house if you can't afford food and medicine? This gives them a way to cash in on their equity when they're most likely to need it.

On the other hand...cashing in equity is a very serious thing. Once gone, they can never get it back. I wouldn't recommend that anyone do it in order to raise money for someone else.

You're right there Eva...I wouldn't do it if it was to give the money to someone else.

On the surface that would seem like a good idea. I think a better idea is to sell the house and downsize. Invest the money in something safe like a CD seeing you are of retirement age.

However, I would wait to sell, because it's one of the worst time to sell.

They are not interested in selling. We have decided against it. We are looking for other ways to help.

Seems to me this is another way for the banks to end up with houses they can't sell - I guess they are expecting the housing market to pick up soon?

Not soon, but eventually, but it's a long-term condition while more people go into foreclosure.

Hey! I'm not of retirement age!

Re: selling the house and downsizing...

well, if you've had a homestead exemption all these years, where your taxes were capped, you'd probably go into sticker shock when you see the property taxes on a "downsized" house.

Also, and this seems to mean less and less to people....I'm emotionally attached to my home. I made it just the way I want it, and would have a very difficult time moving into someone elses idea of what a house should be. I go to open houses sometimes, and have never seen anything I like so much as my home, quirks and all.

just musing....

Do they have life insurance? They could sell their life insurance to a financial
institution that handles life settlements and can get a substantial amount
in cash (depending how high the life insurance is).

I agree - but the same thing would apply with a reverse mortgage - the bank ain't gonna give you so much as the value of your home to base the reverse mortgage on. So either way you would get less than waiting a couple of years.

Well what the banks will be doing (and will do even in an up market) is to factor these values in - for instance if your home is assessed at 300k, the bank will value the home at some pre-determined % less than that - to compensate for the potential risk of losing money. Either that or they will compensate through interest rates/fees.

Sorry I meant the people mismi was referring to or who reverse mortgages are typically geared toward (those in retirement).

Isn't this homestead execption by state? If so, it would definately depend on your state. But yes, I can see where you are coming from.

Not really. The house still belongs to the heirs upon death. (If I'm understanding you right.) Here, let me try and give you some basics of reverse mortgages.

Home Equity Conversion Mortage ( Reverse Mortgage)

Let’s say that you have a home valued at 250,000. The home is free and clear of any liens.
Based on the above scenario, you could get a lump sum of about 155,040, assuming the age of the youngest occupant is 70. (You have to be at least 62 years old.) OR a credit line for you to use as needed. If that credit line goes unused, it would GROW by 3.91%/year. So for example in 5 years, that credit line now becomes available up to an amount of around 187,800. In 10 years it would be over 227,000. OR you have another option of taking a monthly advance so to speak of 920.00/month for as long as you still reside in your home. Absolutely wonderful for someone on a fixed income that is struggling to make ends meet and does NOT want to sell. OR someone that still owes money on a regular mortgage and they have enough equity in their home to take out a reverse mortgage. ( Providing they meet the age requirement) This will payoff the current mortgage note (freeing up their money because now they have NO mortgage payment) PLUS possibly give them a monthly income to boot.

Taking one of these loans out in order to help a relative is akin to handing your home over to the relative! I have written these loans... and If someone were sitting in front of me and telling me that is what they wish to do, I would highly discourage them. At the very least, make sure they understood 110%, what they are doing.

Also, no one should take out a reverse mtg., if they do not plan on being in that home for about 7 years or more. Most people will tell you 5….but I believe 7 is a better work-out. Reason being, these loans carry higher fees. You want to be in this mortgage for a period of time, long enough to amortize the costs, so it makes sense. HECM will carry a 2% gov. funding fee or MIP fee PLUS all the other costs of securing the mortgage.

Your mortgage note becomes due and payable when: A) The last remaining survivor dies or decides to sell the home. B) They fail to live in the home for a period of 12 consecutive months. C) They do not keep up taxes and insurance OR the regular maintenance.

If both parties die while living in the home, ….the home is still part of the estate. However the heirs must sell the home or refinance to pay the note off, if they wish to retain ownership. One thing to note though, if property prices decline…. You never owe more than the value of the property. So heirs do not need to worry about the remaining estate getting hit that way.

Anyhow……that be the basics! Glad your parents have decided not to do this to help out a relative!

PS " It should also be noted that the interest rates are higher than a regular mortgage and on most RM’s the rate is also variable.

Wow.

Thanks Brooke!