Are reverse mortgages a viable option? | TigerDroppings.com

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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

Are reverse mortgages a viable option?


Here's the situation:

My mother, who is 75 years old, lives in a condo in a retirement community in Asheville, NC. She owns a 125 yeard old family store in the Lafayette area. She recently told me that she felt the need to sell the store to raise cash. Both properties are free of any liens.

Let's assume that both assests appraise at $250,000. The condo unit next to hers sold last year at $250k, somewhat less than she paid for hers some 10 years back. It appears to me that Asheville has overbuilt retirement communities since 2008. I see the condo as a depreciating asset - holding its value at best.

The store, otoh, has been rented continuously for 20 years to the same tenant. The maintenance on the building has been excellent and the building is in great shape. It's my opinion that real estate in Lafayette Parish, this property in particular, has been appreciating.

To REALLY simplify my question, I'll stick to these two assests and not go into her other assests that she may be able to generate revenue/raise cash from.

My point ot her was that if she felt the need to cash in equity on one of these two assests, it would be better for her to liquidate equity from the depreciating asset rather than the appreciating asset that is generating a revenue stream for her.

My advice to her was (after we have re-arranged her payouts from investments etc...) if she still felt she needed to increase her income, a reverse mortage on her condo might be a better option than selling the store. If she liquidates the store, she loses that asset as well as the income it generates. If she backs equity out of her condo, she still has use of that asset.

My problem is my own bias. I have no interest in her condo, and have a sentimental attachement to the store. I don't want this to cloud my judgement and advice to her.

My question to the money board is, are these reverse mortgage schemes ever reputable? They seem kind of shady, but I can see the value of the idea in some cases.








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Zach
LSU Fan
Member since May 2005
62853 posts

re: Are reverse mortgages a viable option?


The concept is sound. The application IRL may be shady.

Many old people are property rich and cash poor so that's where the idea came from. The devil is in the details and all of these lenders are gonna have different conditions in fine print.
If you've got the energy to do ground work go ahead and research the different deals.

In fact, asking the folks on this board is a good start.






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rmc
LSU Fan
Zachary, LA
Member since Sep 2004
22493 posts
 Online 

re: Are reverse mortgages a viable option?


I am not real clear on how a reverse mortgage works, other than she gets $x a month and the property goes to the reverse mortgage holder when she dies. Other than that I've never really looked into what else goes on. I would assume if she only gets 10 monthly payments and dies, that there is some lumpsum payment to the heirs. Is that correct?

What about just taking out a conventionl mortgage on her condo? $200k @ ~3-4%.

I concur with you also. I'd rather see her leverage the depreciating asset than one generating income and appreciating.






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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6131 posts

re: Are reverse mortgages a viable option?


A reverse mortgage, in my opinion is for someone who at the end of their life has no other options but to get a reverse mortgage. These companies basically predict how long someone will live and what is the lowest amount of $ they can give them during this period to own their property upon death.

IOW, thinking your mom will get $250k to sign over property to a reverse mortgage lender is foolish.

There is also PMI associated with RM, although I don't know how it is levied.

IMO, your mom does not fit any category which would warrant a reverse mortgage, sounds like you're trying to trick the system that figured out all the tricks before inception.






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BlackHelicopterPilot
LSU Fan
Top secret lab
Member since Feb 2004
32376 posts

re: Are reverse mortgages a viable option?


quote:

These companies basically predict how long someone will live and what is the lowest amount of $ they can give them during this period to own their property upon death.



Not exactly, if I recall correctly.

At the end of the borrower's life, there is simply an asset and a debt that is part of the estate.

So, if the house goes to a child (for example)..the estate has to pay off the mortgage. The child can pay it (cash or his own mortgage) or the estate may sell the house and pay the mortgage (child gets any equity remaining)






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VABuckeye
Ohio State Fan
Oak Hill, VA
Member since Dec 2007
10533 posts

re: Are reverse mortgages a viable option?


quote:

I am not real clear on how a reverse mortgage works, other than she gets $x a month and the property goes to the reverse mortgage holder when she dies


That is not how it works. Yes, she can get a check every month OR take a lump sum.

However, the property goes to her heirs and they have one year to sell or refinance the property. It doesn't just go to the bank. Any equity left in the property after it is sold is distributed to heirs just as it would be in a sale after the mortgage is paid off.

My FIL has a reverse mortgage on his house.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

IOW, thinking your mom will get $250k to sign over property to a reverse mortgage lender is foolish. There is also PMI associated with RM, although I don't know how it is levied. IMO, your mom does not fit any category which would warrant a reverse mortgage, sounds like you're trying to trick the system that figured out all the tricks before inception.

I haven't really looked into how they work, but it seems like it would go something like this:

Assume you have 100% equity.

You basically requst 80% of your equity paid out as a sort of annuity (although it would be a monthly payment) for an agreed upon term - say 20 years.

At the end of the term, you still hold 20% of the equity, the lien holder has 80%. At this point it seems that you could either sell the remainder of your equity to the lien holder for a lump sum pay out, apply for a new mortgage on the 80% that the lien holder has OR sell the property on the market, pay off the lien holder and pocket the difference.

If you die before the end of the term, whatever equity is left is considered a part of your estate. The lien could be settled with a cash sale where the balance is paid off and the difference is applied to the estate.

I'm not trying to trick the system, I'm trying to find out if the scenario I just spelled out is basically how it works, and if there are always other pitfalls that the mortgage lender pulls on you. It's my understanding that the mortgage lender does not take title, it's only a lien and the owner retains title.

And at 75, she's a lot closer to the end than the beginning - actuarily speaking, of course. After all, she is my loving mother.







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Zach
LSU Fan
Member since May 2005
62853 posts

re: Are reverse mortgages a viable option?


It's all about actuarial tables and life expectancy. I will most certainly die 15 years before my wife. I have already advised her to sell our property (she will be retired by then) and buy a small condo and live off the profits of the sale plus her own pension.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

That is not how it works. Yes, she can get a check every month OR take a lump sum. However, the property goes to her heirs and they have one year to sell or refinance the property. It doesn't just go to the bank. Any equity left in the property after it is sold is distributed to heirs just as it would be in a sale after the mortgage is paid off. My FIL has a reverse mortgage on his house.

This is exactly what I was looking for.

Are any of them reputable? Do you have any recommendations?






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VABuckeye
Ohio State Fan
Oak Hill, VA
Member since Dec 2007
10533 posts

re: Are reverse mortgages a viable option?


He did his with Wells Fargo. About as reputable as they come. I know that Countrywide and the other name lenders all have the program in place.





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VABuckeye
Ohio State Fan
Oak Hill, VA
Member since Dec 2007
10533 posts

re: Are reverse mortgages a viable option?


quote:

At this point it seems that you could either sell the remainder of your equity to the lien holder for a lump sum pay out, apply for a new mortgage on the 80% that the lien holder has OR sell the property on the market, pay off the lien holder and pocket the difference.


You can do #2 or #3 of those options. #1 is NOT an option. What the lender guarantees is that no matter how much the balance rises your heirs will not have debt on the house when it is sold.

If you are taking a monthly payout it's going to take a lot of years for the mortgage to be under water.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

In fact, asking the folks on this board is a good start.



Way ahead of you there, Zach.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

your mom does not fit any category which would warrant a reverse mortgage

Also, it's not a matter of whether she fits a category at the moment, it's about my advising her as to give her a peace of mind that there are other options besides selling the store her grandfather built just to raise some cash.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

He did his with Wells Fargo. About as reputable as they come. I know that Countrywide and the other name lenders all have the program in place.

Wells Fargo vs Countrywide.

Yeah, I guess of those two, I'd go with WF as well.

quote:

You can do #2 or #3 of those options. #1 is NOT an option.

Just as well, especially in light of...
quote:

What the lender guarantees is that no matter how much the balance rises your heirs will not have debt on the house when it is sold.

quote:

If you are taking a monthly payout it's going to take a lot of years for the mortgage to be under water.

I was considering the effect of a severely declining real estate market during the term. I think she grossly overpaid for the condo when she bought it, but then I don't see condos as 'real' estate.






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tigerrocket
LSU Fan
Member since Aug 2008
90 posts

re: Are reverse mortgages a viable option?


I think that a reverse mortgage is best for someone who is out of options and needs the income to survive. I would consider selling the depreciating asset, reinvest the proceeds in an income portfolio and rent a nice place. No property taxes, property insurance, and minimal upkeep.







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VABuckeye
Ohio State Fan
Oak Hill, VA
Member since Dec 2007
10533 posts

re: Are reverse mortgages a viable option?


quote:

I would consider selling the depreciating asset


That is a good point. Right now here (northern Virginia) his house is appreciating at a higher rate than negative amortization is accruing. It's a much different situation.






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Ric Flair
LSU Fan
Charlotte
Member since Oct 2005
7138 posts

re: Are reverse mortgages a viable option?


Just out of curiousity, why does she feel she needs money? It seems like the income from the store's rent and a social security check would cover any expenses. Does she travel alot? Medical bills? General anxiety about not having enough money?

The first thing I would do would be to make sure she is getting a fair deal on the rent from the store, i.e. make sure she is leasing the store at the market value, and not a deal she made twenty years ago.






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WildTchoupitoulas
LSU Fan
Member since Jan 2010
14584 posts

re: Are reverse mortgages a viable option?


quote:

I think that a reverse mortgage is best for someone who is out of options and needs the income to survive. I would consider selling the depreciating asset, reinvest the proceeds in an income portfolio and rent a nice place

The fact is, as I pointed out, she really doesn't even need the cash. It was simply my idea to let her know that in the future, should she need to, it would be a viable option without having to sell the store. Just to give her peace of mind. Hell, I just found out that she hasn't even been taking any payout from her investments. I've been speaking with her broker trying to set up some monthly income from them for her. Like I told her, "Mom, it's called a retirement account for a reason, you're supposed to access it when yo're retired - and at 75, you can consider yourself retired."

I didn't want to tell her it was a viable option without first convincing myself that it would be viable. And curiously, her broker said he really didn't know much about reverse mortgages when I asked about it.

The fact is that it'll, in all likelihood, never come to that. Once she deems it too dangerous to live alone, I'll convince her to move in with me (or buy a place for her nearer to my location) and sell her condo. She's joked about building a cottage in my back yard and living there - which is a good sign that she's thinking about coming back to Louisiana.
quote:

reinvest the proceeds in an income portfolio

She's already got one that's doing great, as noted above, she just wasn't getting paid from it. Those are her investments, and she wanted cash is kind of how she was looking at it.






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boosiebadazz
Member since Feb 2008
45284 posts

re: Are reverse mortgages a viable option?


we just investigated one for an older family member and my mom met with the person and she was not impressed. i dont remember the details, but we ended up going in a different direction because the reverse mortgage was so lopsided in favor of the company

really, really do your due diligence






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slackster
LSU Fan
Houston
Member since Mar 2009
6045 posts

re: Are reverse mortgages a viable option?


Most of the time the company will not let you borrow more than 50% of your home's value. Also, you can get a reverse mortgage as monthly payments or as a line-of-credit. In either option, no payment is due while you are living and the interest accrues on the balance of the loan.

quote:

reverse mortgage was so lopsided in favor of the company


In my experience, that is not really the case. They have the same inner workings as an annuity in the sense that they use actuary tables and work in some profit for themselves. The profit is not some huge amount. Remember, lenders are not in the business of selling homes, so they do not want to "own" the property at any point. The reverse mortgage is no more "shady" than a conventional mortgage. Origination fees and what not will apply as well. Just do your homework. They are a lifesaver for some people...






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