“THE LEGAL CORNER”
By Sam A. Moak
ESTATE PLANNING WITH PRIVATE REVERSE MORTGAGES
The information in this column is not intended as legal advice but to provide a general understanding of the law. Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstance.
I have never been a fan of Reverse Mortgages. Reverse mortgages, usually obtained from financial institutions, allow people who are at least 62 years of age to convert their home equity into cash, which is received by the homeowner either as a lump sum, a line of credit, or monthly payments. The loan becomes due, with interest, when the borrower dies, moves out of the home, sells it, or fails to pay property taxes or homeowners insurance. The end result is often that heirs of the owner sell the house, pay off the loan, and keep the difference.
Since an institution involved in a reverse mortgage is advancing money without knowing for sure when it will be repaid, there are high up-front costs for commercial reverse mortgages. Fees can be as much as 5% of a home’s value, and required mortgage insurance premiums can range from 0.1% for loans with a low payout to 2% for those with a higher payout.
As an alternative to commercial lenders, some families set up private reverse mortgages. A private reverse mortgage is basically a private loan to the homeowner, usually from a family member, that is secured by a mortgage on the senior’s house.
For the senior homeowner, a private reverse mortgage can have these advantages:
The costs of having an attorney set up the mortgage should be reasonable and a lot less than the costs of a conventional reverse mortgage with a bank, and there are no ongoing mortgage insurance costs. Also, the interest rate, set each month by the IRS, should be less than the rate on a commercial mortgage.
Since there is no limit on the percentage of the home equity that can be borrowed, the owner can tap into more of that equity and put farther off the day when he or she has to move for financial reasons.
A private reverse mortgage need not be paid back until the house is sold, leaving open the option of the owner’s moving to a nursing home but keeping the house.
The owner can continue to receive payments on the mortgage if needed to maintain the house or to pay for extra care at a nursing home.
For the lending family members, the arrangement can have these advantages over a reverse mortgage with a financial institution:
The financial benefits for the senior family member carry forward to the whole family, because savings on mortgage costs should translate into a bigger estate ultimately passing on to surviving family members.
The flexibility to tap into more equity in the home could give family members the option to hire more paid caregivers or even to pay themselves for providing such care.
Even though interest rates for private reverse mortgages set by the IRS are pretty low, they still return more than can be earned in money market accounts or certificates of deposit. In other words, it beats having money just sitting in a bank.
There are some cautionary aspects to private reverse mortgages. Lending family members need to anticipate that the money they advance may not come back to them for a long time. It is also prudent to consider that there is some risk that the entire loan may not be paid back, if the ultimate proceeds from the sale of the home are insufficient to pay off the loan, with interest. Of course, these and any other concerns should be fully aired and taken into account when the private reverse mortgage is being contemplated in the first place and when its terms are set. Certain family dynamics may not allow a private reverse mortgage to work either.
If you are thinking of a reverse mortgage as a way to obtain cash or looking for ways to transfer assets in your estate, you should sit down with an attorney familiar with real estate and estate planning to find out what will work best for you.
Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.