Reverse mortgages
May 31, 2024 9:40 AM Subscribe
I'm buying a house and have been told I'm eligible for a reverse mortgage. I've also been told that they (rightly) got a bad reputation 20 years ago, but they're better now. There's a lot to think about here, but I'm especially interested in hearing from people with recent experience.
For me, the big benefit is that a reverse mortgage could enable me to retire. I have cancer that isn't considered curable, and though my life expectancy is unknown, I'd really hate to keep working if I don't have to.
The downside I'm aware of is that my children wouldn't inherit as much, but they are OK with that. My understanding is that with the old ones, if you died, the bank just got your house.
What else?
For me, the big benefit is that a reverse mortgage could enable me to retire. I have cancer that isn't considered curable, and though my life expectancy is unknown, I'd really hate to keep working if I don't have to.
The downside I'm aware of is that my children wouldn't inherit as much, but they are OK with that. My understanding is that with the old ones, if you died, the bank just got your house.
What else?
I'm not sure if this is still the case, but with older reverse mortgages if you move out of the house for a year+ the house would be reclaimed. It could cause problems if you had to move in with someone else in a long term but not permanent situation (where you still would need your home back eventually). Maybe not the most common scenario, but worth thinking about.
posted by Eyelash at 10:23 AM on May 31 [1 favorite]
posted by Eyelash at 10:23 AM on May 31 [1 favorite]
It is a very expensive way to access home equity (many fees!). Note that with interest rates going up, you will only be able to borrow against a relatively smaller portion of your equity (because the idea is that the amount owed won't exceed the value of the home and obviously the former grows over time, and faster with inflation; there's a formula that constrains what lenders can lend on federally-guaranteed HECMs based on the prevailing interest rate).
Note also that you remain responsible for taxes, maintenance, and insurance (and they will monitor the first and third in particular!), so you will have to keep those costs in your budget. If you don't pay taxes and insurance in particular, you can be "foreclosed" on. (The year restriction still applies, although there are exceptions. Importantly, for indefinite monthly payments, you need to continue living in the home.)
If you do run into difficulties, distressed borrower servicing sucks. I did one of these cases within the past five years and was shocked at how poor the communications were. I seriously doubt that's improved.
(They'll tell you that the product is "federally guaranteed," by the way, but that's guaranteed to the lender by the government and offers you no protection at all, except to the extent that the government happens to impose requirements to protect its own interest and incidentally you.)
All that said, for someone in your situation--where your life expectancy is curtailed and poor health makes early retirement particularly desirable and (I'm inferring) you're comfortable with not having the house as one of the assets you can leave to your heirs--a HECM (not a proprietary offering) might not be a terrible idea (especially if you're not open to a straight sale of the house and move into a rental). You definitely want the monthly "annuity" payment option, not the lump sum. For someone with a shortened life expectancy, in theory the latter might be a better "deal" on average, but with your health situation, what you need is to secure a predictable income, not to maximize income.
posted by praemunire at 10:56 AM on May 31 [6 favorites]
Note also that you remain responsible for taxes, maintenance, and insurance (and they will monitor the first and third in particular!), so you will have to keep those costs in your budget. If you don't pay taxes and insurance in particular, you can be "foreclosed" on. (The year restriction still applies, although there are exceptions. Importantly, for indefinite monthly payments, you need to continue living in the home.)
If you do run into difficulties, distressed borrower servicing sucks. I did one of these cases within the past five years and was shocked at how poor the communications were. I seriously doubt that's improved.
(They'll tell you that the product is "federally guaranteed," by the way, but that's guaranteed to the lender by the government and offers you no protection at all, except to the extent that the government happens to impose requirements to protect its own interest and incidentally you.)
All that said, for someone in your situation--where your life expectancy is curtailed and poor health makes early retirement particularly desirable and (I'm inferring) you're comfortable with not having the house as one of the assets you can leave to your heirs--a HECM (not a proprietary offering) might not be a terrible idea (especially if you're not open to a straight sale of the house and move into a rental). You definitely want the monthly "annuity" payment option, not the lump sum. For someone with a shortened life expectancy, in theory the latter might be a better "deal" on average, but with your health situation, what you need is to secure a predictable income, not to maximize income.
posted by praemunire at 10:56 AM on May 31 [6 favorites]
(Oh, just to be clear, on your death, the house will be sold (or the debt must be paid in some other way, i.e., your kids could pay it off if they have the cash). In most cases, that will still mean that "the bank gets your house," though you will be paid any proceeds that exceed the existing debt. You will be unsurprised to hear that sales through the issuing financial institution tend not to yield the highest values--all they care about is covering the existing debt. So if I went into one of these arrangements, I would do so with the assumption that my house is out of the estate and my heirs will get none of its value.)
posted by praemunire at 10:59 AM on May 31
posted by praemunire at 10:59 AM on May 31
Response by poster: Thanks for your answers.
The person I was talking to is a family friend who works with mortgages (so not someone trying to sell me). He told me that there are reverse mortgages now where the heirs are given a period of time - six months or so - to sell the house, with the bank then getting what it is owed.
posted by FencingGal at 12:09 PM on May 31
The person I was talking to is a family friend who works with mortgages (so not someone trying to sell me). He told me that there are reverse mortgages now where the heirs are given a period of time - six months or so - to sell the house, with the bank then getting what it is owed.
posted by FencingGal at 12:09 PM on May 31
He told me that there are reverse mortgages now where the heirs are given a period of time - six months or so - to sell the house, with the bank then getting what it is owed.
Investigate the details carefully in advance (six months might be a little long), but this can be possible (it's one of the "in some other way"s I mentioned above). Basically, and weird as it sounds, death of the last surviving borrower constitutes a default on a reverse mortgage. Then there is a "cure" period, which in this context means the loan getting paid off one way or another, before the issuing entity sells the house and recoups that way. In practice, the majority of houses end up getting sold by the entity, because the likely remaining equity in the house is low compared with the effort and because of course the paperwork involved deters people (the mortgagor has a senior lien on the house, which can be satisfied out of sale proceeds but requires some extra work).
posted by praemunire at 1:58 PM on May 31
Investigate the details carefully in advance (six months might be a little long), but this can be possible (it's one of the "in some other way"s I mentioned above). Basically, and weird as it sounds, death of the last surviving borrower constitutes a default on a reverse mortgage. Then there is a "cure" period, which in this context means the loan getting paid off one way or another, before the issuing entity sells the house and recoups that way. In practice, the majority of houses end up getting sold by the entity, because the likely remaining equity in the house is low compared with the effort and because of course the paperwork involved deters people (the mortgagor has a senior lien on the house, which can be satisfied out of sale proceeds but requires some extra work).
posted by praemunire at 1:58 PM on May 31
I feel like I’m a bit confused. When I think of a reverse mortgage, I think of someone older who owns a house and who want to get a reverse mortgage to turn that equity back into cash to be able to live out their lives in that house.
But you’re saying you’re about to buy a house. So I’m assuming you already either have a bunch of money or bunch of equity in a current house and you want to buy and reverse mortgage that.
I guess I’m just wondering does it make more sense to do something else? Buy the house with a down payment and mortgage it and keep/invest your cash?
And I know this is outside the scope of the question but maybe explore other options if the goal is to retire off the money you have, like getting a small apartment instead of a house, moving to a low cost of living area, try to live on the beach in some country that your money goes further and I don’t know if you’re in the USA, but ideally has better cheaper health care?
posted by cali59 at 2:42 PM on May 31 [6 favorites]
But you’re saying you’re about to buy a house. So I’m assuming you already either have a bunch of money or bunch of equity in a current house and you want to buy and reverse mortgage that.
I guess I’m just wondering does it make more sense to do something else? Buy the house with a down payment and mortgage it and keep/invest your cash?
And I know this is outside the scope of the question but maybe explore other options if the goal is to retire off the money you have, like getting a small apartment instead of a house, moving to a low cost of living area, try to live on the beach in some country that your money goes further and I don’t know if you’re in the USA, but ideally has better cheaper health care?
posted by cali59 at 2:42 PM on May 31 [6 favorites]
(cali59's question is a really good one...sorry, somehow my eye went right over the "buying a house" part! You have to have equity built up to have a reverse mortgage. Using a reverse mortgage to help finance a new mortgage is strange and you would almost certainly be better off selling the first house. Even if you just want the money for other living expenses, better to sell the first house and invest the proceeds in a fairly conservative income fund or (if you must, many other caveats here) an annuity...with the limits and the fees, a reverse mortgage is a more expensive, limited, and cumbersome way to get the equity in your first home than just selling.)
posted by praemunire at 2:49 PM on May 31
posted by praemunire at 2:49 PM on May 31
Response by poster: I didn't provide more details because I didn't want a lot of unhelpful suggestions about finances in general, but since praemunire has put a lot of effort into answering this question (thank you), I will explain.
I moved from a lower cost of living area to a higher cost of living area to be near my children. Living somewhere cheaper is not going to work. I'm renting now. It's very expensive, and buying a place and getting a mortgage will be cheaper. I sold the house I owned previously, which will enable me to make a 50% down payment. I need to make this much of a downpayment to afford a mortgage. That is doable, but it means working for longer than I want to. Starting off with this much equity is what may make me eligible for a reverse mortgage.
So there's the explanation, but please stick with the question I asked.
posted by FencingGal at 3:53 PM on May 31
I moved from a lower cost of living area to a higher cost of living area to be near my children. Living somewhere cheaper is not going to work. I'm renting now. It's very expensive, and buying a place and getting a mortgage will be cheaper. I sold the house I owned previously, which will enable me to make a 50% down payment. I need to make this much of a downpayment to afford a mortgage. That is doable, but it means working for longer than I want to. Starting off with this much equity is what may make me eligible for a reverse mortgage.
So there's the explanation, but please stick with the question I asked.
posted by FencingGal at 3:53 PM on May 31
I have never looked into this in great detail, but--setting aside expenses, other options, etc. as requested--I don't think it's even likely to be possible. If you take out a reverse mortgage on a property that already has a mortgage, the proceeds will need to go to satisfy the existing balance first. Neither the mortgagee nor the reverse mortgagor are going to cede the first position on that debt!
So...if you start off with 50% equity, 50% debt, and the reverse mortgage is only ever going to lend you a percentage of the home value, even if you take a lump sum to try to address the existing mortgage, you are unlikely, especially in the current interest rate environment and given that you're relatively young, to receive enough to pay off the original mortgage entirely. 60% of home value is the absolute cap under most circumstances, but then it's adjusted by your age and by interest rate (and don't forget the upfront fees!). Since it's a new mortgage, you won't have any appreciation to draw on. (And then that's just taking the lump sum option; even if it manages to be enough to cover that, there's unlikely to be much, if anything, left over for a monthly payment, if that's something you were hoping to get.)
I mean, sure, see if it even pencils out at that level if you want to, I don't have enough data to tell you it's literally totally impossible, but it's probably not doable (and almost certainly not your best option, but that's all I'll say about that).
posted by praemunire at 4:33 PM on May 31
So...if you start off with 50% equity, 50% debt, and the reverse mortgage is only ever going to lend you a percentage of the home value, even if you take a lump sum to try to address the existing mortgage, you are unlikely, especially in the current interest rate environment and given that you're relatively young, to receive enough to pay off the original mortgage entirely. 60% of home value is the absolute cap under most circumstances, but then it's adjusted by your age and by interest rate (and don't forget the upfront fees!). Since it's a new mortgage, you won't have any appreciation to draw on. (And then that's just taking the lump sum option; even if it manages to be enough to cover that, there's unlikely to be much, if anything, left over for a monthly payment, if that's something you were hoping to get.)
I mean, sure, see if it even pencils out at that level if you want to, I don't have enough data to tell you it's literally totally impossible, but it's probably not doable (and almost certainly not your best option, but that's all I'll say about that).
posted by praemunire at 4:33 PM on May 31
Response by poster: Thanks for your insight. The person I talked to (who worked in mortgages for fifteen years) was talking about a reverse mortgage instead of a regular mortgage. He thought it could be worked out so that my equity was covering the mortgage payment.
Obviously, I need to talk to people at a mortgage company, but I wanted to hear some thoughts here before I talk to anyone. And if it turns out to be possible, I will obviously think very hard about the whole thing before making any decisions. Thanks again for all of your help with this.
posted by FencingGal at 4:44 PM on May 31 [1 favorite]
Obviously, I need to talk to people at a mortgage company, but I wanted to hear some thoughts here before I talk to anyone. And if it turns out to be possible, I will obviously think very hard about the whole thing before making any decisions. Thanks again for all of your help with this.
posted by FencingGal at 4:44 PM on May 31 [1 favorite]
Something to explore might be Life Estate/Life Tenancy. This is where the property is owned by one party and the other party has a lifetime right to live there. I don't know the details but my fathers girlfriend had done this with her condo so she would have no asset and be able to get Medicaid while still being able to live at home and my uncle's mother in law had a life tenancy in Queens NY in a duplex my uncle and his wife bought from her. They were still able to sell it after they got divorced and the ex mother in law still live there. Also this reminds me that 2 parties in the neighborhood each bought a house, built an ADU, (accessory dwelling unit/mother in law cottage,) and then sold the property while retaining a lifetime tenancy in the ADU. I've been meaning to knock on their doors and ask them about it.
posted by Pembquist at 2:18 PM on June 2 [1 favorite]
posted by Pembquist at 2:18 PM on June 2 [1 favorite]
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posted by Bunglegirl at 9:56 AM on May 31 [2 favorites]