And is it/can it be a scam? Is it an actual governmental program? What little (and it IS very little!) I’ve heard just doesn’t sit exactly right with me.
Really not that complicated – read this. The idea is someone with a lot of equity in their home but lacks cash, e.g., seniors who have lived in the same house for a while. Their money is locked up in their house. They can borrow from their equity and “pay” it back after they’re gone. Not a scam and not necessarily a government program, but HUD does offer relevant insurance.
Wikipedia has a decent article here.
In very simple terms, it is a loan taken out from the bank (either in a lump sum or monthly installments) with the equity of your home as collateral. So it’s the opposite of a regular mortgage in that the balance of the loan increases over time. Typically to the point where the house is sold (either when the loan holder dies or sells it to move out). Interest and fees are typically just added in to the balance amount.
So as an example, say you are 70 years old and have payed off your $100,000 home. You take out a reverse mortgage that pays you, say, $1000 per month for 15 years (I have no idea if those numbers are accurate, just an example). Then in 10 years you get sick and need to move to a nursing home. You have a $80k debt to the bank, so you sell your home for $125 (hey, it appreciated some!), pay off your debt and still have $45k left over.
But what if you died in the home at 84 years old? By that time your loan plus interest and fees are now $95k and the value of your house has gone down to $90. Typically the bank just eats that loss.
In the end it is a way for elderly people to cash in the equity of their homes to live off of.
I have a question also, hope that’s okay.
Let’s say you buy a house for $100,000, with an $80,000 mortgage on it. To get that mortgage, where I live, you must take out insurance that pays the house off if the mortgage holder should die.
Years go by, you pay down the mortgage, now you want to take some of the equity out of the house, say you manage this by waiting till it opens again and borrowing the original $80,000 again. Everything stays the same, the mortgage payment, the insurance cost, etc. You take $20,000 out and pay debts or have fun, whatever.
My question, and I do have one, is this. Can you keep doing this? And does the insurance to pay off the mortgage still apply, in full, if you take out a reverse mortgage?
So, for instance, this house that has $80,000 in mortgage on it, is now worth $180,000. If you took a $50,000 reverse mortgage out, would the mortgage insurance, cover the full balance on both mortgages, or just the first?
Banks used to be happy to let you borrow large amounts of money against the value of your home, on the theory that your home would always appreciate in value, so if you defaulted on the loan they’d easily get their money back when your house was foreclosed on and sold.
Except there’s the slight problem of the housing crash that you might have heard about. They aren’t so eager to make such loans nowadays.
Both my (now-deceased) grandmother and my parents took out reverse mortgages.
They get a lot of bad press because they’re not the greatest financial move (there’s a lot of fees), but what seems to get missed is that people who are in the market for reverse mortgages aren’t looking for a long-term financial deal; they’re looking for quality-of-life, right now, and reverse mortgages do an excellent job of providing that.
My grandmother was always poor. Her husband (my grandfather left her when my Dad was around 12) was a logger, and though he worked hard, they didn’t have a lot of extra money. They did, however, have a house. When she was in her 80s, my parents helped her arrange a reverse mortgage, and it helped her quite a bit in her later years.
My parents are in better financial state, but they are far from wealthy. Between pensions and social security, they live a decent life, but they didn’t have a lot left over for vacations or toys or all those things you want to do/have when you’re retired. They took out a reverse mortgage, and now they live pretty well - they’re not vacationing in Europe every year or anything, but they drive pretty nice cars, take off for road trips, and are generally enjoying life.
In the right circumstances, reverse mortgages can be great.
Two big problems hit the reverse mortgage market recently. The first is the housing crash; both banks and homeowners are suddenly reluctant to rely on ever-increasing equity, which makes RMs harder to buy and harder to sell.
The other problem was the inane-at best, criminal-at-worst practice of pushing reverse mortgages as part of an investment package. That’s right, some fly-by-nighters would market the reverse mortgage to the elderly as a way to free up investment capital! Of course, they sold high-risk investments to make the yields exceed to loan interest, which left these old folks twice underwater when everything went south.
Honest reverse mortgage specialists are eating it right now, and cursing greedy bastards in their sleep.
This is a great statement.
If Grandma wants to stay in her house, but Social Security payments aren’t enough to live on, a reverse mortgage can help. If Grandpa is trying to leave as much money as possible to his heirs, then it’s probably not such a good idea.
Not sure I understand. Why would the bank make you take LIFE insurance? The whole point of the mortgage is to cover a possible failure to repay by taking the house and selling it, whether you live or die. What banks *will *do is make you take out insurance on the house; a crumbled heap of ashes probably won’t sell for the original $80,000. They also take out mortgage insurance themselves so if you default and the bank can’t sell the house for the $80,000, they collect the difference from AIG. (aka the taxpayers). Typically they add the full cost of that insurance to the mortgage when you take it out. (At least, that’s how CMHC mortgage insurance in Canada works).
You can keep remortgaging; this is the famous “using the house as an ATM” which got the whole US housing market into trouble last 2 years.
The flaw in your logic is the cost of life insurance. When 75-year-old granny wants to get a mortgage and buy life insurance, how much do you think they’ll charge for 10 years of premiums on a $80,000 mortgage payout? $100,000? $120,000? More? The usual result of reverse mortgages or lump-sum remortgage is that the person dies with debt owing on the house. The bank and the homeowner are betting they’ll die before the mortgage hits the house value; depends on the terms of the mortgage. then the house is sold; instead of dying miserable with a $180,000 house free and clear, granny dies having lived the high life leaving a cash estate maybe worth $20,000 once the house is sold to pay off the mortgage balance. Good for her, bad for heirs… but so what? It’s her house.
The advantage of a reverse mortgage is you get a regular paycheque. With a full lump sum mortgage, yes you get $80K to blow right away; but you still have to make payments on $80,000 for the next 15 to 30 years; so you can’t really spend the whole $80,000 anyway unless you have other money coming in or plan to die quickly.
You can bet, however, the bank is in business to make money. They payout in general much less than the overall value of the house; unless you exceed life expectancy tables by a significant amount (if it is a lifetime annuity payout).
By coincidence, I read this on Wikipedia recently:
Talk about bad luck - you make a financial bet on an old lady checking out in the near future, and she goes on to become the oldest reliably recorded human in history. :smack:
A reverse mortgage is essentially an expensive home equity loan that your estate pays back after you die.
I think elbows is talking about PMI.
1 - it’s for your lifetime, at least until/unless you sell the house. The payments don’t stop if your house has decreased in value, or if you live a lot longer than the bank expected.
2 - if the bank has payed more than the house is worth, the excess is not taken from the rest of the estate. The bank can legally only collect what they can sell the house for. If there’s excess, the excess is paid back to the estate.
You don’t get either of these (potential) benefits with a home equity loan.
ms calment is the first person i think about when i hear reverse mortgage sometimes very rarely it works in favour of the older person.
Good points. I was oversimplifying.
It worked very much in favor of my grandmother and my parents. They’re loving the extra cash every month.
It doesn’t work in favor of ME, however, as they’re spending my inheritance! (very much just kidding… I hope my parents spend all their money having fun while they can!)