ssia = subject says it all
Spell it out for me like I’m a n00b, cuz I am. There’s got to be a catch.
You die before you get your money’s worth.
Seriously. These are usually worded such that you get a certain payment for life, and the bank (or whoever) gets your house when you die. It’s a gamble on both sides, but the bank will have better actuaries, and will win on most bets: they’ll pick an amount for each payment that lets them make a profit at sale time (remember houses usually appreciate in that period, too. Or did until recently). I don’t think they offer them to young people, but I’m not sure.
Still, I understand these things can sometimes be a godsend for the elderly, allowing them a predictable, usable income during their life, with a “payment” that occurs after you’re safely dead. If you’ve got no one to leave your house too, that can seem pretty attractive.
ETA: In very simple terms, its basically an annuity that you pay for with your house’s future value.
You don’t own your house anymore for yourself or for your heirs. You could sign the deal and drop dead the next day and the reverse mortgage folks just walk away with your house for very little money. The flip side is that you could live to be 120 years old and have someone paying you more than your house was ever worth just because they have to keep sending you checks for still existing. Like all insurance, it is a numbers game but they really need you to die sooner rather than later to make money on the deal. They structured it in their favor based on how long they expect you to live versus how much they will have to pay out.
They can be an Ok deal for someone that is determined to live in their house but has little cash. However, selling the house and buying something cheaper is going to retain the most money overall.
Not so much in an appreciating housing market, which will usually grow faster than the inflation adjustment (if any) on the payments. And houses are usually appreciating, although I’m not sure I’d make that bet over the next 3-6 years.
The downside is that you’ll have less equity in the home to leave to your heirs than you would if you had taken out a traditional mortgage and made payments–instead of declining the balance on a reverse mortgage increases until you die or sell your home. Then its subject to a big lien from the reverse mortgage.
I’d recommend the AARP site and the mortgage professor: Top 55 Questions on Reverse Mortgages
FWIW, I’m a great fan of annuities of all types for retirement income. And, as Timewinder says, a reverse mortgage is basically a type of annuity. The main downside is that the value of the house is consumed by the annuity, i.e., it can’t be passed on to ones heirs. Personally, I would much rather that my parents and grandparents live comfortably than that they endow me with a bequest. Another downside is that, in assessing the value of the payment stream, one must bear in mind that inflation will continue to increase the cost of living, but the payment stream usually does not. A third downside is that a RM generally eliminates the ability to liquidate the asset to raise capital, say, to buy another house or move into an assisted-living retirement community. It occurs to me (just now) that a good question to ask is whether there’s a way to “buy out” the RM five, ten or twenty years down the road. Possibly (maybe even probably) such an option is available, but it would reduce the payment stream, as it increases the risk of the RM “lender.”
This is not true, at least in the reverse mortgages I’ve seen. If you drop dead the day after you get one, the reverse mortgage lender only is owed the amount of $$ that they’ve paid out, adjusted for interest and fees. If the house is worth more than is owed, any residual returns to the estate.
Not all that different than a normal mortgage, really. If the house is worth $200K and the mortgage balance is $100K, the estate gets $100K.
From what I can tell, they’re a very good deal. My parents, intent on living it up and dying broke, just took one out on their house. From what the lenders told them, they’re far from alone in wanting one.
It is a very good deal if you don’t have kids that need the house. Make sure you get one from a reputable company, of course.
And watch out for what happens if there’s a sudden decrease in the value of the house. Check the small print thoroughly.
From a practical standpoint, what appears to be the problem with reverse mortgages–according to my dad, who has been trying to convince his mom to get one–is that most people, when given a sudden windfall, end up spending themselves into bankruptsy. This has happened to several of my grandmother’s friends, so now she’s afraid to do it.
I also don’t think it’s a annuity. As I see it advertised hereabouts, it’s a one time lump payment. No more than 40 % of the houses value, to insure against dropping house values or other unexpected eventualities. You don’t begin to make payments as long as you live in the house. Once you’re out, you sell the house, pay off the amount you took out (either in payments, or as a lump sum) and you, or your survivors pocket the difference. Your survivors have the option of making the payments and keeping the house, should they choose. It just means they don’t get the place completely mortgage free.
Not that bad a deal for people with a house that has appreciated considerably in value, but have either no income or a small income not keeping pace with rising costs. Also handy for those suddenly in need of a large amount of cash. Such as an elderly american facing expensive medical bills do to bad health in old age, without having to leave their home.
It’s just a way of accessing the equity in your home without having to take on any payments. Until you move then you pay it off or not, as you choose.
I am curious to know if you have to own the house outright to get one.
You can get them as lump sum, periodic payment, or line of credit.
The allowable LTV increases with age. You can run numbers through this calculator: http://www.financialfreedom.com/calculator/Input_new.asp
In order to do that, they’d have to refinance the place, which used to be easy to do. It’s a bit harder for some now.
No. But it has to be a first lien, IIRC, so it would replace the existing mortgage(s).
You don’t have to own the house outright. The reverse mortgage company buys out any existing mortgages. But you can’t owe very much on the house - there are eligibility rules.
It is not an annuity nor a lump sum. The way I understand it, each month the reverse mortgage company essentially pays the mortgage, and the mortgage payments go away for the owners. In addition, the owners get a bit of a lump sum at the beginning of the mortgage - in my parent’s case, about 10% of the value of the home. I think they also got a line of credit.
When the owners die (or for whatever reason no longer live in the house) the reverse mortgage balance must be paid off by the estate. In most cases, this is by selling the house. But it’s up to the heirs to figure out how to do it, and the ownership of the house goes to the heirs. Not really all that different than when someone dies with an outstanding mortgage.
My parents spent a lot of time looking into a reverse mortgage, including consulting with a real estate lawyer. They didn’t want to be screwed out of their home, but they did want extra money to spend while they were still healthy enough to spend it. For what it’s worth, it’s a federal program backed by HUD. There’s a good page about it here.
There is a maximum Loan to Value ratio that increases with age. Beyond that, if you don’t have much equity, no mortgage is going to net you much cash. But another advantage of a reverse mortgage is no mortgage payment. Some people take out a reverse just so they can stop making payments.
http://www.financialfreedom.com/ReverseMortgage/FAQs/#5
Sort of. They refinance the mortgage, replacing it with their own. The terms of the new mortgage don’t require payments while the mortgagor(s) live in the home.
Again, it depends on the product and options chosen.
Right.
So, I have a question that’s been bugging me. There’s a TV ad up here in Canada for a reverse mortgage company, and they say ‘you don’t have to pay back a penny until you move out or sell your home.’ I assume that you would have the option to keep on with the loan and give the house to the company, right? I’m just confused with the ‘move out’ part. So seriously, if you move out of your house even though you continue to own it, they’ll force you to pay back the mortgage? It just gives me images of a little old widow in a nursing home going broke having to pay back the mortgage while she still technically has the house and the kids are figuring out what to do with it (buy it from the company or whatever).
This thread makes things a lot clearer for me now. I wondered why anyone would go for this when you get gypped in the end anyway - money now when you’re 60, and then you are paying it back when you’re 80? WTF? But now I get it. We give you money, we get your house when you die. I wish they could have alluded to this in the commercial, it would have been more clear to me.
(If you’re wondering why, at 20, I’m so interested in this, I think it’s pathological. It’s weird, back when I was a kid there was a life insurance commercial similar to this one and it was so ingrained in the minds of all us kids we chose to do a parody of it for a school project.)
http://www.fha.gov/reverse/index.cfm (discussing occupancy requirement)
, CONTENTMANAGEMENT Homes & Investment Properties in
Reverse mortgages used to be called secured annuities.
The problem is that the person issuing the mortgage knows the odds are in their favor, since they are experts constructing the things based on the odds.
They also know that as a one-time borrower you will never be able to compute the odds and must rely on them to tell you what the downside is. But they don’t, and that’s why it’s a bad deal.
Like whole life insurance, which is also a popular bad deal, they count on their knowledge and rosy promises to obscure the true odds.
What odds? There are no more odds in a reverse mortgage than there is in a standard one, at least in the reverse mortgages I’ve seen.
Right. It’s pretty unlikely you’ll be able to borrow enough or live long enough to have the debt exceed your equity in the home. Then again, that’s not really the idea. The plan is that you borrow the money and don’t have to pay it off as long as you’re alive, still own the house, and occupy the house.
And if you do die with a positive balance (ie, the reverse mortgage company hasn’t paid off the house), and equity goes to your heirs.
I don’t see much risk for the homeowner. The risk is all with the mortgage company, which does stand to come up negative if the people live much longer than expected.