Reverse Mortgages: How Do They Determine How Much?

[Kalhoun]

I have two relatives; my ex-mother-in-law and my sister-in-law, who have obtained reverse mortgages to get them through their last days. My ex MIL is 90+ and has a home worth around $300K. My SIL is 62 and has a home valued at around $110K.

I thought I was told by the family of the ex-MIL that the general rule was the older you are, the less money they give you. Then my SIL (who is in something of a fog due to the morphine) said the older you are the MORE they give you. Ex-MIL got about $80K and SIL got $40K. Obviously, both figures are but a fraction of the worth of their homes.

How do they figure how much you get? I assume they factor in some kind of interest rate, so that if the heirs want to repay the mortgage, they will do so with some sort of fixed rate of interest, i.e., $80K at 5% over, say, 10 years. Obviously, we don’t know how long either of them will live (though I think in my SIL’s case, a year would be pushing it). But it seems rather unfair that if my SIL dies tomorrow and her heirs choose not to repay the loan, the reality is that they are losing 2/3 of the market value of the house.

Anyone have any experience with these from either side? Thanks!

[FRDE]

A reverse mortgage is where you take out a normal mortgage and some/most of the money is invested to help with the interest payments. Because there are two financial transactions going on the vendors can ‘double dip’ for fees. Just to complicate things the ‘mortgage’ receipts could be used to buy an Annuity.

In both your cases I would go for a secured loan or overdraft

The simpler you keep things the cheaper they are.

If you can handle it, get them to sign over a proportion of their assets to you, use those and your own to get a standard mortgage - preferably a drawdown one so you keep interest to the minimum.

The alternative is just to get a ‘secured overdraft’ for them, which is about the same thing, but a lot less complicated.

Lenders like fixed period loans

[Kalhoun]

@FRDE

A reverse mortgage is where you take out a normal mortgage and some/most of the money is invested to help with the interest payments. Because there are two financial transactions going on the vendors can ‘double dip’ for fees. Just to complicate things the ‘mortgage’ receipts could be used to buy an Annuity.

In both your cases I would go for a secured loan or overdraft

The simpler you keep things the cheaper they are.

If you can handle it, get them to sign over a proportion of their assets to you, use those and your own to get a standard mortgage - preferably a drawdown one so you keep interest to the minimum.

The alternative is just to get a ‘secured overdraft’ for them, which is about the same thing, but a lot less complicated.

Lenders like fixed period loans

In both cases, the deals are already done. They both have the reverse mortgages in place.

So you’re saying the bank kept the rest of the money to invest and the earnings from that investment cover the interest on the $40K my SIL actually received?

[FRDE]

@Kalhoun

In both cases, the deals are already done. They both have the reverse mortgages in place.

So you’re saying the bank kept the rest of the money to invest and the earnings from that investment cover the interest on the $40K my SIL actually received?

Yes, I think it likely that is the case

• 40k on 110k for a one year loan is outrageous, but it might not be that

Possibly it is more reasonable than that, it might be a max of 40% on assets

[Dewey_Finn]

@FRDE

A reverse mortgage is where you take out a normal mortgage and some/most of the money is invested to help with the interest payments. Because there are two financial transactions going on the vendors can ‘double dip’ for fees. Just to complicate things the ‘mortgage’ receipts could be used to buy an Annuity.

I believe this is incorrect. As I understand a reverse mortgage, the interest owed accumulates until the house is sold. With a conventional mortgage, the borrower’s equity increases over time, but with a reverse mortgage it decreases.

And my understanding is that the payment amount is based on the borrower’s life expectancy and the amount of existing equity in the house. The house is sold after the owner dies and the proceeds pay off the principal and interest.

[Kalhoun]

@Dewey Finn

I believe this is incorrect. As I understand a reverse mortgage, the interest owed accumulates until the house is sold. With a conventional mortgage, the borrower’s equity increases over time, but with a reverse mortgage it decreases.

And my understanding is that the payment amount is based on the borrower’s life expectancy and the amount of existing equity in the house. The house is sold after the owner dies and the proceeds pay off the principal and interest.

This has always been my understanding, as well. I still can’t figure out where they come up with the figure, what age has to do with it, or if imminent death affects the amout/rate you can get.

[FRDE]

It sounds like your relatives have been conned

• they will have been sold a 30 year annuity to cover a max two year debt

Sometimes I wish that I could push that sort of deal

• something stops me

[Kalhoun]

It’s not a con. From AARP’s site:

A New Kind of Loan: In Reverse
A “reverse” mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

all at once, in a single lump sum of cash;
as a regular monthly cash advance;
as a “creditline” account that lets you decide when and how much of your available cash is paid to you; or
as a combination of these payment methods.
No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

Other Home Loans
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don’t make your monthly payments. But with a reverse mortgage, there aren’t any monthly repayments to make. So you can’t lose your home by not making them. Most reverse mortgages require no repayment for as long as you — or any co-owner(s) — live in the home. So they differ from other home loans in these important ways:

you don’t need an income to qualify for a reverse mortgage; and
you don’t have to make monthly repayments on a reverse mortgage.

What I don’t understand is how they arrive at the amount they arrive at.

[Dewey_Finn]

I assume it’s like an annuity. An actuary can estimate the borrower’s lifetime and based on that they can determine how large the payments to make so that at the end of the expected period, the sale proceeds can cover the accumulated interest and payout to the borrower. So someone with a shorter life expectancy can expect to receive larger payments than someone with a longer one (assuming the homes are the same).