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Hypothetically, suppose a person who is close to retirement, who has comfortable savings that will last his/her lifetime( if need not to pay monthly mortgage) and is close to retirement and has 2 or 3 kids who are independent and working ( and does not need any financial support).

This person has a home suppose valued at approximately 800K with a outstanding loan of about $400K and about 18 more years to full payment.

So if the person want he can go for reverse mortgage ( where some money will be paid every month to the person) or Jumbo Loan ( where low interest payment will be required per month).

The person does not like either options and he want a product that will not require any monthly payment from/to him/her and still be able to live in home. and upon the natural death of him/her and surviving spouse, the home be sold and proceed to pay off the balance and any remaining portion to be given to the kids.

So the question is , what (if any) is this product called and how to get it?

The home is in an area where home values had a normal growth( not steep ).

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    So, why exactly does this person want to do this? Tap into the equity of the home for cash? – Nosjack Aug 21 at 18:10
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    What happened to the other 1/3 of a kid ? – Bob Baerker Aug 21 at 18:12
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    I'm still confused what the question is - why do they need to borrow money? Upon death the home can be sold to pay off the mortgage, so no "product" is needed for that. – D Stanley Aug 21 at 18:21
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    @Neil There's no free lunch. If they want to keep the house they'll have to pay the mortgage. They could borrow against the equity to make the payments for a while, but that might run out before they die. – D Stanley Aug 21 at 18:24
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    @Neil Could they take a reverse mortgage on the equity in the home they have paid off and use the payments they get from that to pay the mortgage payments on the rest? – Vality Aug 21 at 18:33
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For this particular case, a Reverse Mortgage actually fits the requirements exactly. In a reverse mortgage, there is no recurring payment or bill that is due. The debt is secured against the property, and any accruing interest or debts are simply tallied against the property itself. The loan is due upon death or sale of the underlying asset. The lien can also be fulfilled by paying the debt in full, as usual.

Typically, these loans are structured in a way so that the equity you can draw out of your home is a portion of the full value of the home in order to protect the lender.

When the new loan is drawn up, part of the payout can be structured to pay off the initial mortgage. In terms of net assets, this doesn't actually impact the total networth of the debt + home, it simply is moving the debt from a monthly payment to a hidden lien secured by the underlying property.

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    It does impact the net worth over time- your net worth shrinks over time since the interest on the RM is likely more than the interest on the mortgage. – D Stanley Aug 21 at 18:59
  • @DStanley That was obviously in the context of how a reverse mortgage moves the existing debt which has a monthly payment into a hidden debt with no monthly payment, but the networth does not change. This is important to clarify because you don't want people to think that a reverse mortgage makes their existing debt just "go away" – Shorlan Aug 26 at 18:17
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A Home Equity Conversion Mortgage is close to (if not exactly) what you're looking for. Essentially, you "borrow" against the equity of the house, and use those proceeds to pay off the existing mortgage. The loan accrues interest that is paid off once the house is sold.

Here are the problems with this type of mortgage:

  • The interest that accrues is most likely going to be more than the interest you're paying now, so you're paying more in the long run
  • The debt is essentially passed on to the heirs (through inheritance they're not going to get). If the heirs are all fine with this, it's an option, but they need to know what they're getting into.
  • Fees for these mortgages are very high.

Unfortunately, with a 50% loan-to-value ratio, it's unlikely that they'll be able to borrow enough to pay all of the existing mortgage. Even then, the compounding interest on the $400k balance is going to eat up all of the equity pretty quickly. At 5%, the loan balance will double in about 15 years. Ideally the value of the house will grow as well, but the loan will eat away the equity faster.

The best option is to just pay the mortgage payment out of retirement savings until they get to a point of desperation when they need to sell the house. It might mean delaying retirement a little while or finding some supplemental income to stay afloat. My fear is that the reverse mortgage is going to be treated as "free money", allowing them to live more luxuriously in retirement, at the expense of the heirs' inheritance (which, again, if they're fine with that then it is an option).

If they cannot afford the mortgage now, the best financial solution is to sell the house and buy a new one for $400k. Another option would be to have the children help with part or all of the mortgage payment. This, too, will have to be agreed upon by all heirs for fairness, and you risk some conflict if some of the heirs to not pay their "fair share".

  • It surprises me people seem to feel leaving money on death is important enough an obligation to work into extreme old age or dramatically reduce life quality. I always assumed the assets one saved throughout life were to enjoy those years, not to take to the grave through obligation to give the money to someone after death, but I understand opinions vary greatly. – Vality Aug 22 at 21:46
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    @Vality It is part of a fundamental view on the meaning of life, and there are many cultures with different views on the subject. The preservation of heritage (the family farm), building/maintaining a legacy (if you received an inheritance it would seem important to leave one), or simply the belief that providing a better life for the next generation is the ultimate goal of a life well lived (and deciding if receiving money means better or not). Most people accept a trade-off of how much to give and when - paying for college vs bequeathing real estate, etc. Some views of life aren't popular. – BrianH Aug 23 at 13:10
  • The problem with the reverse mortgage here is that it feels like free money. You get your mortgage paid for without any immediate consequences. It's only when the estate is settled that the heirs realize that their parents million dollar house house has little or no equity. I'm not saying that the parents are obligated to skimp just to leave an inheritance, but there are more efficient ways to either enjoy their present life or leave more for their kids and grandkids to enjoy. The reverse mortgage is a shortcut that the banks charge way too much for. – D Stanley Aug 23 at 13:19
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I will try to answer my own question. I think it should be possible to have such kind of product as Bank/Mortgage company can still make money and the home owner can live in home. Below are my assumptions and solution.

  1. home is 50%+ paid.

  2. Interest rate is 4.25% , it is 3.55 so safe to assume 4.25.

  3. Appreciation on home is historically 2.37% so taking 2.25%.

  4. Home owner pays for the property tax and home insurance. and Home owner will pay zero monthly payment to mortgage company.

  5. administrative/Selling cost for the bank will not exceed 10%.

  6. Both Home owners are at least 50 years old with joint age being more than 105 years.

  7. Calculation is on yearly basis

Calculation

Result: bank is still in 9309 profit.

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    good calculation – riya Sep 2 at 22:07

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