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Parents want to do a reverse mortgage

3,291 Views | 18 Replies | Last: 3 yr ago by SteveBott
Guppy
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TLDR: parents have a large unique home that will be very difficult to sell and are thinking of doing a reverse mortgage.

My parents are both mid 70s and live in a nice house outside of El Paso across the state line in New Mexico. It's a private fly in community with its own runway. They built a beautiful spainish style house out there 20 years ago and added a hanger to the back. My dad then planted approximately 5000 vines around the house and sells the grapes to a local vineyard. So basically not only a unique area, but a vineyard as well.

Last night as dinner he casually mentioned he has started the process for a reverse mortgage. The house is appraised correctly IMO He owes just under $200k. The bank will give him some money. He wouldn't go much more into the initial terms of the reverse mortgage.

His reasoning is he believes the house will be very difficult to sell when they die and he doesn't want to burden the kids with trying to sell it. I asked how long he thinks it would take to sell and he told me when he asked the local HOA they told him the avg house in the fly in community takes 39 months to sell - over 3 years on average.

My folks plan on staying in this house until they die - for now. I live 20 mins away but I work out of town and would nothing more than for them to follow me when I move so I don't have to commute for work. My dad will not entertain that thought at all. He wants to stay here until he dies.

He feels that a reverse mortgage will free up cash by allowing him to stop paying his mortgage and to unburden the family when we eventually try and sell it. I have only heard negative outcomes with a reverse mortgage. I don't see how this is a good idea at all long term.

So what are your thoughts? Any and all ideas appreciated.
dubi
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Quote:

His reasoning is he believes the house will be very difficult to sell when they die and he doesn't want to burden the kids with trying to sell it

I think it is a terrible idea. Tell him you will deal with selling it!
Premium
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I just read up on them, it seems like a bad deal especially since it takes 39 months to sell in their area - if / when they die you would be forced into a quick sale to cover the mortgage.

On the other hand, why don't they just do a cash out refinance to a traditional loan with these incredibly low rates? Just have to leave 20% in the house - sounds most legit and then they can use the funds however they want.
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SteveBott
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Wrong. The lender has to sell it or the family can at their option. Depends if there is still equity left when they leave the house. Even if what they owe goes over the total value no one is liable for the deficit.
Guppy
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Thanks Steve. Kind of info I'm looking for. Would you recommend a cash out refi instead?
SteveBott
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I looked hard at expanding into reverses. I diciided not to.

But there is only one question to answer. Do the parents want to leave the equity to their heirs or spend it while they are alive. That's it. Basically the money they get and not paying the loan means they have more cash to spend now.

This is an FHA loan and based on age, ability to pay the home expenses and value the loan is established. That loan could be 50-90% of the Value. The old loan is paid off and a new loan is set up with no payments but accrued interest owed. At some point it's possible the interest exceeds the loan and over value. Then the lender eats the loss.

Or if they leave the home while equity is there the heirs can sell, payoff the loan and interest, and keep the rest.

Major problem is loan costs. FHA gets a good chunk and so do everyone involved in the transaction. They add up much more then standard loans.
SteveBott
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Also my 72 YO neighbor just did one. She did a major home improvement, paid it off and now can retire from work. To some folks they are very beneficial
Guppy
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Thanks again Steve. As far as I am concerned, I would rather they spend the money now and enjoy their life with what they have earned. I've never counted on or thought about getting an inheritance from them. So if these gives them more finically flexibility to travel and see the world then I say great.

My concern is if they change their mind in the next few years, or 5-10, and decide they want to sell. What then? I assume they just would owe the mortgage company more money than they do now. Any major drawbacks if they sell in 5-10?

I assume they would need to stay in the house for a long period of time 15-20 years or more in order for the interest to exceed the loan or is that all a wild guess?

Thanks again
SteveBott
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Hard to say how long before it's zero equity with out reviewing the deal. But 10-15 years is about right. Look and male and female life expectancy and their age and you will close. Both have to leave the home so one could leave for whatever reason but the other gets to stay.

If they want to back out they just refinance into a standard mortgage and resume making payments.

I was a little harsh saying you would never have to quick sale. It's possible but pretty small chance. Lots of options to market if you choose. I do believe it would take some time to sell it.
Premium
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I just read up on them, it seems like a bad deal especially since it takes 39 months to sell in their area - if / when they die you would be forced into a quick sale to cover the mortgage. said:


On the other hand, why don't they just do a cash out refinance to a traditional loan with these incredibly low rates? Just have to leave 20% in the house - sounds most legit and then they can use the funds however they want.SteveBottI just read up on them, it seems like a bad deal especially since it takes 39 months to sell in their area - if / when they die you would be forced into a quick sale to cover the mortgage.

On the other hand, why don't they just do a cash out refinance to a traditional loan with these incredibly low rates? Just have to leave 20% in the house - sounds most legit and then they can use the funds however they want.
---------------------------------------

Wrong. The lender has to sell it or the family can at their option. Depends if there is still equity left when they leave the house. Even if what they owe goes over the total value no one is liable for the deficit.
WTF, wrong? Lame response. If they care to perhaps have any equity at death they sure as hell would be forced into a quick sale if they didn't have the money to buy it themselves and sell on their own time frame. Considering the OP said the average sale in their area takes 39 months this is a horrible idea. Considering there is currently $750K in equity this should be considered. WTF, horrible advice.
SteveBott
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I carefully explained the reverse. You need to reread my responses. Again only question to ask....

Do you want to leave the equity to your heirs or spend it now? It's that F. Simple. The heirs can just walk away. No distress sale needed. Parents spent their money on themselves.
Martin Cash
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Guppy said:

TLDR: parents have a large unique home that will be very difficult to sell and are thinking of doing a reverse mortgage.

My parents are both mid 70s and live in a nice house outside of El Paso across the state line in New Mexico. It's a private fly in community with its own runway. They built a beautiful spainish style house out there 20 years ago and added a hanger to the back. My dad then planted approximately 5000 vines around the house and sells the grapes to a local vineyard. So basically not only a unique area, but a vineyard as well.

Last night as dinner he casually mentioned he has started the process for a reverse mortgage. The house is appraised correctly IMO He owes just under $200k. The bank will give him some money. He wouldn't go much more into the initial terms of the reverse mortgage.

His reasoning is he believes the house will be very difficult to sell when they die and he doesn't want to burden the kids with trying to sell it. I asked how long he thinks it would take to sell and he told me when he asked the local HOA they told him the avg house in the fly in community takes 39 months to sell - over 3 years on average.

My folks plan on staying in this house until they die - for now. I live 20 mins away but I work out of town and would nothing more than for them to follow me when I move so I don't have to commute for work. My dad will not entertain that thought at all. He wants to stay here until he dies.

He feels that a reverse mortgage will free up cash by allowing him to stop paying his mortgage and to unburden the family when we eventually try and sell it. I have only heard negative outcomes with a reverse mortgage. I don't see how this is a good idea at all long term.

So what are your thoughts? Any and all ideas appreciated.
I worked as a regulator in the mortgage lending business for almost ten years. We never had a legitimate complaint on a reverse mortgage. The only complaints we got happened when mom and pop didn't tell the kids about it. At death, the kids found out they weren't getting the house free and clear like they planned.
SteveBott
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Yep. That is why I always ask my one question. If they say they want the money now I follow up with how they feel about not leaving money for kids
BullSprig07
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I blame Tom Selleck
SW AG80
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I had a family check into these a couple of years ago. What she told me--if she got it right--was they will loan no more than 50% of the equity the owners have in the home. If that is true, doesn't sound like your parents would get much money.
SteveBott
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Again there is a matrix for cash vs value. If both are 62, minimum age to apply, yes 50% would be about right since life expectancies for them to live another 20 years. An 80 YO female might get 80%+.
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Guppy
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Thanks for all the good info everyone.

I believe my parents have enough in their 401k. But they simply just don't want us to deal with selling the house when they die. And therefore, in their opinion, the reverse mortgage makes sense.

I would rather them spend the money now as well on travel and living life. I don't care if I don't get a dime from them. I just hope they don't get taken by the mortgage company and receive a small amount for the reverse mortgage and then the bank makes out like a bandits even if my folks stay in that house for 15 more years.
SteveBott
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They can see the final proposal and decide if they want it. They don't commit until closing. And even then they have 3 days to back out
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