When a parent is aging, it is tempting to look to a commercial reverse mortgage to ease financial matters. A reverse mortgage is a loan for senior homeowners using all or a portion of the home’s equity as collateral.
Cash now pay later: With a reverse mortgage, money is borrowed, but not repaid until the last surviving homeowner permanently moves out of the property or passes away. When that occurs, the clock starts ticking and the estate has approximately 6 months to repay the balance of the reverse mortgage, refinance the reverse mortgage, or sell the home to pay off the balance.
Rules to Qualify and Live By:Not everyone can take a reverse mortgage. There is an age requirement of 62 on all homeowners. The home must have equity and must be owned free and clear orall mortgage balances must be paid off completely at the closing. Generally there are no income or credit score requirements for a reverse mortgage. However, there are rules for how much can be taken and the interest rate at which interest will accrue. You can use the reverse mortgage to provide an income stream or a lump sum distribution. Typically, when a lump sum is used, in part it is used to pay off an existing mortgage and to provide cash to pay off other debt.
To Reverse or Not to Reverse: While the terms of a reverse sound really tempting, there are some pitfalls which can make it a harsh trap for the unwary. First, the cost of the transaction, a generally not advertised feature, can be large. Fees of $10,000 are common. I am personally aware of a family that paid a fee of $38,000 approximately 5 years ago. Second, the loan will accrue interest over time. A quick Google search led me to a fee of 12.25 % per annual which, according to the website, would likely increase over time. This rate is not just on the amount borrowed, but on the transactional fees listed above. Third, the transaction comes with a mandatory repayment periods that can be onerous. On the death of the homeowner, the estate will have a limited time (likely 6 months) to prepare the house for sale, find a buyer, sell the house, and pay off the reverse mortgage. Failure to act in this time frame may result in the loan going into foreclosure. In addition, this time frame also applies if the homeowner moves to a long term care facility. Finally, because the home must be owned by the borrower, it generally cannot be in a trust. Therefore, in order to sell the house, a trip to probate court or guardianship court may be needed.
Private Family Reverse Mortgage: Over the past year, we have seen more family members turning to a private reverse mortgage. Children pay parent’s expenses through a loan that is secured by the family home. The transaction must be arm’s length, negotiated and should have loan repayment terms including an adequate interest rate. However, unlike a commercial reverse mortgage, it is likely entered into without nearly as significant transactional fees, and the interest rate is likely significantly lower. In addition, a child who is a lender is likely much more likely to not press for repayment or foreclose a loan on a parent. In addition, the home may be held in trust name thus skipping the court costs.
My dad used to say that if something seems too good to be true, it probably is. A reverse mortgage may be the right answer for your family, but before you take that step, know what you are doing. Read the contract with care and know what you are signing. Think about other options like a private family lending.
Should you have any questions about this, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
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