Reverse Mortgage

[bobcat1995 71]

First off, this isn't about me. I’ve always thought reverse mortgages were a bad idea (and I still do), but we recently had a death in the family, and dealing with the reverse mortgage when we sold the house was surprisingly easy. It was definitely a good deal for the lender, though—they loaned $85k twelve years ago, and by the time we sold the house, the lien had grown to $188k. From my family member's side, they never made any payments on the original $85k.  Plus, there was still equity in the house when it sold that went to the surviving spouse.  Of course, it would have been a lot better for them to have an additional $185k from the sale but they still made over $130k.

Now, my dad is 79, and his wife is the same age. Their house and cars are paid off, and their main income is from Social Security. As their heirs, we aren’t expecting anything from them in terms of an inheritance. Houses in their area go for $400k-$500k.

At their age, what are the downsides of a reverse mortgage?  What is the downside of taking a $150k reverse mortgage and never making a payment? Even if they live another 12 years, there would still be equity in the house. It seems like the extra money would give them a bit more financial security (they just had to install a new A/C system).

Thanks!

[Slacks 6819]

Depends on the interest rate, right? 

My guess is they'd be better off with a cash out refi of 75% of the equity, sitting that cash in a HYSA or other safe, interest bearing account, and then making monthly payments.

The downside comes off they have (or choose) to spend too much of that and end up unable to pay.

But I'm pretty sure the things that makes a reverse mortgage a terrible deal is interest rates.

[UTPhil2006 3802]

1 hour ago, Slacks said:

Depends on the interest rate, right? 

My guess is they'd be better off with a cash out refi of 75% of the equity, sitting that cash in a HYSA or other safe, interest bearing account, and then making monthly payments.

The downside comes off they have (or choose) to spend too much of that and end up unable to pay.

But I'm pretty sure the things that makes a reverse mortgage a terrible deal is interest rates.

As my esteemed colleague Mr Slacks said, there are upsides and downsides to both, but I can get you a quick rate quote for a reverse and cash out so you can have some raw numbers to look at.  PM incoming

[Nice Guy Eddie 13508]

Remember that if the homeowner(s) moves out, the loan becomes due most likely resulting in a sale. Make sure it’s very clear how that works if they need to move into assisted living. 

Older folks often need less of a house as they age, often eventually only needing the equivalent of a 1 bedroom apt. It might be much better for them financially to sell and rent a smaller place. You do need to make sure that no one (family member or stranger) doesn’t con them out of their money. Potentially even where the old folks have limited access to their main funds.

for what it’s worth, I’ve never understood the need for a reverse mortgage. I would work out the math to identify the fees.

Edited October 20 by Nice Guy Eddie

[Firemans4Horn 18034]

Dr. Wade Pfau is a retirement income wonk. I found this podcast enlightening on when a reverse mortgage can make sense:
 

https://podcasts.apple.com/us/podcast/the-long-view/id1462214964?i=1000660217081

[Pato del Muerto 52485]

On 10/19/2024 at 6:04 AM, bobcat1995 said:

What is the downside of taking a $150k reverse mortgage and never making a payment

This doesn’t sound like a reverse mortgage unless you are skipping some steps. A reverse would be a lender makes monthly payments to the borrower, so the principal grows slowly.   Is that the situation you are talking about?

[Nice Guy Eddie 13508]

18 hours ago, Firemans4Horn said:

Dr. Wade Pfau is a retirement income wonk. I found this podcast enlightening on when a reverse mortgage can make sense:
 

https://podcasts.apple.com/us/podcast/the-long-view/id1462214964?i=1000660217081

appreciate the link. I have to admit that I didn't realize reverse mortgages could be as complex as they describe and how it could function as a HELOC, without that name. I had no idea that you could pull out funds on demand, and optionally pay them back. I was also ignorant that the mortgage loan funds available can increase over time.

Couple of takeaways for me:

• they seemed to disagree with the govt describing reverse mortgages as a last resort for retirement income but then they proceed to acknowledge that it is the last resort for many. They specifically said their advice wasn't for the person calling in after watching a Tom Selleck tv ad.
• I never thought much about a reverse mortgage as a backup plan for sequence of returns risk. While it seems doable, it feels to me like its too much of a complex financial product for the average consumer to use "correctly." 
• And if someone had the knowledge and discipline to use it as a risk mitigation plan, I would believe it's a low probability that they would need to do so. That person would most likely be set with more than adequate retirement income.
• I didn't know that you have to pay an upfront 2% insurance premium on the value of your house. This insures the mortgage company in case you end up owing more than the value of your house. I believe there is an ongoing premium as well. I assume you can roll the upfront and ongoing premium into the borrowed amount decreasing your equity.

For those using it as a last resort, I could see many spending all of the money ASAP, and ending up broke without any home equity. Yes they can remain in the house as long as they keep up with taxes and HOA fees but I would have to bet this is a more common situation than the savvy retirement investor who continually maximizes the mortgages costs vs stock returns.

[Firemans4Horn 18034]

I did a financial plan recently for a single woman (no heirs) in her mid 50’s that had ~40% of her net worth in her home equity. If she wanted to age in place vs downsize/move to assisted living; a reverse mortgage could make a ton of sense. 

[Nice Guy Eddie 13508]

13 minutes ago, Firemans4Horn said:

I did a financial plan recently for a single woman (no heirs) in her mid 50’s that had ~40% of her net worth in her home equity. If she wanted to age in place vs downsize/move to assisted living; a reverse mortgage could make a ton of sense. 

From the podcast link you shared, there was mention that the homeowners were only forced to sell if they were away from the property for 365 days in a row. It would be critical to have clarity on this timeframe since elderly sometimes go to rehab/skilled nursing centers for extended periods but not permanently.

[Gene Parmesan 4002]

I'm down for anything this man says

[Gil Bang 25907]

On 10/20/2024 at 3:43 PM, Nice Guy Eddie said:

Remember that if the homeowner(s) moves out, the loan becomes due most likely resulting in a sale. Make sure it’s very clear how that works if they need to move into assisted living. 

Older folks often need less of a house as they age, often eventually only needing the equivalent of a 1 bedroom apt. It might be much better for them financially to sell and rent a smaller place. You do need to make sure that no one (family member or stranger) doesn’t con them out of their money. Potentially even where the old folks have limited access to their main funds.

for what it’s worth, I’ve never understood the need for a reverse mortgage. I would work out the math to identify the fees.

eh.  Maybe "most likely", but I've seen heirs do a refi to payoff the reverse.

On 10/20/2024 at 4:49 PM, Pato del Muerto said:

This doesn’t sound like a reverse mortgage unless you are skipping some steps. A reverse would be a lender makes monthly payments to the borrower, so the principal grows slowly.   Is that the situation you are talking about?

Nope.  Different types.  Some are cash payment up front, some pay per month, and some are a combo. 

You can also purchase a home using a reverse mortgage.  Put X down (usually 60%+ or so, depending on age) and live there for the rest of your life with no payments.