Very good point. The pluses and minuses of staying vs selling are complicated enough without having to deal with the hellish nightmare of medical coverage in the US.
There is not a responsible independent financial advisor on earth that would give advice without taking into account every aspect of individual circumstances. Most financial articles I’ve read are pretty negative about reverse mortgages in general, for understandable reasons, but there’s always a “but …”. There are cases where it actually works well for people, provided you understand what you’re getting into, and the costs of getting out. It’s certainly not the darling of any financial analyst, but it’s far superior to alternatives like death from psychological trauma or living under a bridge for lack of suitable alternatives.
While i can appreciate that i don’t know the particulars of dropzone’s financial situation and i acknowledge i am not a certified financial planner, 99.99% of the time it is a bad idea.
Dropzone wants opinions from the SDMB and thats mine.
Here’s another wrinkle given this additional info about @dropzone’s situation.
Many (most? all?) reverse mortgages are written that they “mature” when the owner/resident can no longer live in the house and retreats to some cared-for living facility, moves in with family, etc.
At that time the RM company takes the house, sells it, and keeps the money. It would not be good to sign up for an RM, collect 2 monthly payments, and give up the house and all the value it might otherwise have delivered to @dropzone or his estate.
It always “feels right” to try to stay in your home as long as possible, even grasping at financial straws to do so. Logistically it’s certainly the easiest = laziest thing to do.
As the President of a hundred+ unit condo building in FL I see this play out several times per year, where someone has built their end-game around “I’m not leaving my home except in a box.” Then infirmity sets in and they’re in a care facility for a year or more before the end. Very, very, very few people age in place all the way to the last day.
As healthy and as youthful 60-ish as I am today I’ve learned not to plan on being one of those tiny minority. It’s a lousy bet with an awful downside.
Think of it this way, I’ll use round numbers to make it easy;
You buy your home for $100K, but as it’s amortized over 20 yrs, you will in the end, pay out a total of, say, $200K. Well, okay, that’s understandable the loan runs 20 yrs, right?
All cool so far. Now they will only give you 45% of the equity on a reverse mortgage.
Whereas your mortgage interest owing slowly decreased, with each payment, on your reverse mortgage the interested owed is actually increasing with each payment. Interest is accruing on the interest now! The bank anticipates there being zero left owing to you by the end, that’s how quickly it’s piling up!
So, you bought a house for $100K, paying $200K over twenty years, then you get a reverse mortgage of $45K, where the interest scales up so quickly, that the bank just bought your house for $45K.
An exceptional deal, all around, for the bank, not a great deal for the home owner, in most cases.
Sell the house and take away the full sale price, instead of trying to have your cake and eat it too, is my advice.
It would shock me but not entirely surprise me if there were reverse mortgages in the US that operate as you describe, but only because thievery is rampant in some aspects of the US financial system. They certainly don’t operate that way in Canada, which would be considered outright theft and almost certainly illegal, and I doubt that most RMs in the US operate that way, either. The way it works here (and I was assuming in the US, too, with the caveat to look at the fine print in detail and have a lawyer review it and discuss it with the prospective borrower) is that the borrower retains full ownership and control of the property, and can sell it (or not) as he sees fit, whenever he chooses to do so, in the usual manner at whatever price he sets. The RM company is simply a lienholder on the title, just like an ordinary mortgage company or one that has secured a home equity line of credit (HELOC) by taking a lien on the property. Also, getting monthly payments or lump sum amounts on request may be the borrower’s choice, depending on the terms of the plan, and in the latter situation the reverse mortgage is actually quite similar to a HELOC, complete with an ability to pay down the balance (though the amount of paydown may be limited). You can also sell the house at any time (or pay out the RM entirely if you happen to get a financial windfall) subject to a diminishing scale of penalties that I believe disappear entirely after about five years, leaving only nominal administrative costs to close out the loan.
So a decent RM is not nearly the thievery you described, though perhaps some specific deals might be. But the accumulating compound interest can definitely be a killer – that much is absolutely true, so in my mind the key is not to hang onto it for too long, even though the RM company would like you to. The best case scenario is that if you have a nice place that you like living in, and plan to get out, say, after five years, the total compound interest you end up paying actually looks very favorable compared to what you would have paid in rent over that same time period.
Of course if you sold and rented you’d have a big bundle of cash to invest, too, but you’d need really good investment strategies to get any kind of decent return while minimizing risk, especially with interest rates so ridiculously low these days. Certainly in my experience in the past 30 years or so, and especially the last 10, real estate ownership has outperformed any other investments I’ve had. I’ve always found it a very good balance between investment security and upside potential.
I think you’d better cite this claim. While I agree that RMs are generally bad business, this simply would not hold up against any regulatory scrutiny.
IIRC when RMs first came out 30+ years ago there was no regulation on these things. Almost every horror story imaginable occurred. Much of that is pre-mainstream internet and hence hard to cite online now. But I did read about it in the legal mags my financial attorney wife subscribed to.
Nowadays RMs in the USA are (mostly) a highly regulated product. The most common flavor is properly called a Home Equity Conversion Mortgage or HECM which is almost purely a creature of regulation; other than the fees, there’s very little variation between suppliers of HECMs. Other less regulated deals are still available about which we can say almost nothing without reviewing the contract of the specific deal on offer.
As to HECMs and only HECMs …
There are two parts to my claim.
The first is that if the RM holder stops living in the house and moves in with family, to a nursing home, etc., the RM matures and must be promptly paid off.
See this government page:
and this industry trade group page:
Both make it clear the loan matures as I said. Which is very relevant to our OP since he’s already in and out of care facilities. If one of those “temporary” stays gets long enough then Bang! he’s gotta pay off the loan. Which, practically speaking, means selling the house.
The second part of my claim was that when the property is sold, the RM company keeps any overage. I was wrong as it applies to HECMs.
Ref the PDF above see the “please be aware” sub-head under “Step four” on page 3. If the outstanding loan balance is less than what the house sells for, the owner or the estate gets the overage, not the RM company.
Interestingly, Investopedia makes the same claim and cites a particular government page at FTC from last year. Which page as of now doesn’t contain the statement Investopedia says it once did.
The thing that makes this work for the lender is that FHA insures the loan balance. So if a house gets underwater, the RM company and the heirs aren’t on the hook, the FHA is. Since the government is absorbing that risk, the RM seller doesn’t have to.
In the pre-HECM days (and perhaps still in the current non-HECM deals) the RM seller essentially laid off the risk of going upside down on one loan by keeping the equity on other loans where the borrower died / moved out early. Since it was a matter of contract, it was legal. And may still be so for the less-regulated non-HECM products. Sorry, no cite for this.
Bottom-line: I score me as correct on one issue and proven wrong on the other for most people in most cases. But not proven wrong for all people in all cases. Though it’d be nice to be proven totally wrong on this one; I hate predatory finance.
Thanks for clarifying your earlier remarks. I have no nits to pick with the above. You are certainly correct on the key point that the property owner must continue to live in the house in order for the RM to be valid; moving out for any reason causes the loan to become due and payable.
One downside to selling now. As long as you own your house, the return on your invest is paying your rent with no tax on the return. Selling the house and investing the money means paying tax on the return while not getting any tax relief on the rent you pay. This is one big way that the poorest subsidize the richest.
Thanks for doing the legwork. While you were right on one count, I don’t view that particular point as at all suspect. The second claim was the frightening one since that would be tantamount to theft. What method for loan maturity would be better than this?
I don’t follow this question. What are you trying to ask?
As to theft, it’s only (legally) theft if the borrower hadn’t agreed to the terms. If he agreed, it’s part of the deal, not a theft. Whether that kind of potentially predatory stuff ought to be illegal is a separate matter. And at least as to HECMs since about 2006, it has been illegal.
In general finance-speak, there is a big risk in RMs: the idea the debt can grow without bounds even as the ability to pay it back goes ever downwards. Somehow that risk has to be laid off. Either the lender gives a real shitty payout rate, only loans against a small fraction of the equity of the collateral, has recourse to the heirs’ own money, or the government insures the deal. OR … the mortgage company treats it more like life insurance companies do: some people pay tiny premiums & get huge payouts, other people do the opposite and the overall total works out close to even but in the insurer’s long term favor.
In the early days of RMs, the latter insurance-like approach was used. Some consumers made out great on the deal, others got hosed. That led to political action to limit / prevent the hosing.
Now the Feds insure everyone’s shortfalls, and the Feds in turn limit their exposure by demanding that HECMs have a low equity payout percentage. The taxpayers are safe(r), but the borrowers get a relative pittance for their trouble and risk. And the RM sellers just grind out their small percentage deal after deal.
I can’t speak for Omniscient, but the point that I was implicitly making (and perhaps s/he was, too) is that, in the absence of outright immoral and blatantly predatory contract terms such as the scary one you mentioned – the lender claiming the entire value of the house regardless of what you owed – that a reverse mortgage is fundamentally an economically rational financial contract. By “rational” I don’t mean necessarily a wise choice for the borrower, but rather, if based on fair terms and absent any extraordinary terms favorable to the lender, works the only way that such a contract could work in a world that charges interest for the time value of money.
It’s often been said that a home equity line of credit is a far better deal than an RM. Sure, but it requires a monthly payment and a commensurate income, just like a conventional mortgage. An RM is just a HELOC that has no such payment requirement, so the accumulation of compound interest is a natural consequence. It is “predatory” if and only if it is overhyped to elderly homeowners who may not fully understand its long-term implications, or who may be dissuaded from wiser alternatives. The fact that it’s not an extraordinarily one-sided deal is well illustrated by the fact that in Canada, there is only one specialty bank that provides RMs, and that’s all they do. No one else will touch it.
You parsed your response in such a way that there were 2 claims, one you got right and one you got wrong. I interpreted those claims as:
You have to pay back the loan when you move out.
You can surrender all your equity to the lender regardless of how much remains when it’s sold.
Now, the first claim is clearly true and no one took issue with it. So whether you were right or wrong is moot. The inflammatory claim, that you would give away all your equity if you died in 2 months, is the one we challenged. You corrected that.
But then you finished with
Though it’d be nice to be proven totally wrong on this one; I hate predatory finance.
Which implies that you think the first point, that you must sell upon moving out, is predatory. If so…what would be more reasonable?
Ahh, I’m still failing to communicate well. My fault.
IMO … The requirement to surrender the house upon move-out is completely reasonable & non-predatory. The fundamental purpose of the RM has run its course, the likelihood of the house falling into disrepair or tax arrearage goes way up once vacant, etc. Makes logical sense as well as financial sense from both sides of the bargain.
What I meant was that we now know that surrendering excess equity to the RM company upon sale of the property is prohibited for the most common and heavily regulated form of RM, the HECM.
We do NOT know that it is prohibited for all possible sorts of RMs that are for sale in the USA today. Therefore this (relatively) predatory practice may still exist. Without a detailed dig through the entire corpus of US banking & consumer protection regulation we here on the 'Dope simply don’t know for sure.
And there is one financially plausible approach to managing the risk profile of a portfolio of these RM loans that does result in both parties agreeing to the equity surrender in return for a higher payout. Both parties take on additional risk of any one deal turning out especially good or especially bad for either party. Only the RM seller has the benefit of diversifying that highly variable performance risk over a large number of loans; the borrower does not. IMO it’s an open question whether a) lenders are offering these deals today, b) whether borrowers ought to take these deals, and c) whether lenders ought to be allowed to offer these deals. We here just don’t know.
True, but the capital assets left by the deceased are vulnerable even if they have been willed to someone.
If my plan not to have children continues to go well, then the only thing I’ll be leaving is my corpse. For me, and depending on my circumstances when I get old, it might be a great way to finance my retirement home. I’ll live in it and then croak in it, and then they can have it back.