How do private reverse mortgages work?

Question

In the next few years, my elderly mother will likely need access to the equity in her house in order to continue to keep up with expenses and property taxes. She owns her house outright.

A reverse mortgage seems to be the perfect choice, outside of the rather outrageous fees they seem to carry, which would eat into her funds. So we are taking a hard look at private reverse mortgages, which seem to be a great option. I have read everything I can find online about private reverse mortgages but there is a definite lack of details on how they work.

A few disclaimers: I understand the risks of mixing family and financial matters. The family members involved in this (potential) transaction all completely trust each other. All of her children are (and will remain) equally represented in her will, so I would not anticipate any dispute over her assets.

It's not clear if it will be one or more of her children that fund the loan. For the sake of this question, let's assume it's just going to be me.

How does the loan work logistically? Let's say the total loan amount will be $100K. Would I take the money and lock it up in an account that she can draw from when she needs it? Or would she let me know when she needs to draw funds, and the assumption is that (at that time) I will have the required funds? In short, how are the funds guaranteed to be available?

Also, let's say that she lives to a really ripe old age, and exhausts the original $100K. I understand that we would not be able to force her to sell the house to collect on the loan (just as a bank wouldn't be able to). Would the interest just continue to pile up, and if it exceeded the value of the home, too bad for the lender (which would be fine--I just want to understand how it works)?

Finally, what type of attorney would one use for this kind of loan?

Answer 1

How does the loan work logistically?

Here's how a reverse mortgage works (from the homeowner's point of view), which could be the same for a "private" one:

• You sign over the right to the equity in the home to the lender.
• The lender pays you periodic payments, which represent a "debt" to the lender. (you could also get a single lump sum, which also is a debt)
• That debt accrues interest as time passes at some rate
• When you sell the home, die, or default on the terms of the loan (e.g. by not paying taxes or insurance, or the home falls into disrepair), the loan becomes due, including any accrued interest and other fees
• If you owe more then the house sells for, the lender eats the difference.

Would I take the money and lock it up in an account that she can draw from when she needs it?

You could - this would be the "lump-sum" approach. The interest will accrue on the total amount.

Or would she let me know when she needs to draw funds, and the assumption is that (at that time) I will have the required funds?

Yes, this would be an option as well. Interest would accrue on the total drawn amount periodically (banks would probably do daily, but you can set the terms)

In short, how are the funds guaranteed to be available?

They're not - the lender (you) would have to have the cash to lend.

Personally, I would not go into this much complexity. With multiple lenders, ALL need to have the cash to lend, or you will have a nightmare keeping track of who lent how much, how much interest is accrued, etc.

I would simplify things significantly (since you aren't intending to profit, just help out with cash flow) with one of these options:

• Each of you gives a gift to your mother to help out. No change to inheritance, just a gift in kind.
• Each of you give different amount, with the amounts to be reimbursed from her estate (and the rest divided however she sees fit).
• One of you buys the house from her (at fair market value), and allows her to live rent-free

I would not take a home equity line of credit - you should never borrow money just to pay living expenses. If the taxes and insurance on the home are too much then she needs to find other forms of assistance, reduce other expenses, or sell the home. If you want to keep the home in the family then one of you should buy it.

Finally, what type of attorney would one use for this kind of loan?

You need to talk to an estate planning attorney - they might have other options that are easier and cheaper. Plus, they can help with the will to ensure that everything is squared in the end. All of this absolutely need to be in writing to make sure that it's clear to all heirs what the situation is.