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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?

  • This is going to get very messy if you go through with it. Example scenario that could turn sour: Do any siblings who will not be contributing to the 'cash pool' have fond memories of the house? Did you all grow up there? Because if at the end of this one of you owns the childhood home, even if you paid for it, that ownership could taint the relationships with other siblings who feel they didn't have the opportunity to "pre-buy" the house at the right time. Look at your options, sure, but keep in mind there is real value in taking this completely out of the family's hands, just in the bank's. – Grade 'Eh' Bacon Sep 15 '17 at 15:39
  • Are the taxes and insurance the only expenses? Are there not other expenses that can be cut? And social security does not cover them? – D Stanley Sep 15 '17 at 16:11
  • @DStanley she can't live on SS alone. She is already pretty frugal so there is not a lot of room for cutting expenses. – Phil Sandler Sep 15 '17 at 16:58
  • @Grade'Eh'Bacon none of that is a concern. Please see my disclaimer. – Phil Sandler Sep 15 '17 at 16:58
  • @PhilSandler Then I'm sorry to say that she can't afford the house. If you want to help out with gifts or paying the insurance/taxes then that's great but I would not go into debt (or have her go into debt) to do so. – D Stanley Sep 15 '17 at 18:05
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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.

  • So in theory, she could want to take funds out, and the funds may not be available? I can't imagine that could happen with a bank, but with a private lender it seems more feasible. Should that happen, has the lender breached the contract? – Phil Sandler Sep 15 '17 at 17:03
  • Of your three options, the first two are interesting. The second one would work more or less like a loan, but without interest or a lien. I would be slightly concerned that it would make it look like she has more money than she actually does have, which could affect certain situations (asset tests). – Phil Sandler Sep 15 '17 at 17:10
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    @PhilSandler Well, that depends on the contract - if it's not specified then you'd have to settle the dispute in civil court. – D Stanley Sep 15 '17 at 18:06
  • Yes - effectively reverse mortgage acts like a line of credit with the house as collateral. If you have the money to help out there are much simpler ways to do it. Another difference is the interest is not deductible on a reverse mortgage (but it sounds like tax is not a concern since there's no income) – D Stanley Sep 15 '17 at 18:09
  • Yeah, lending her money without an official loan/lien is something to think about. In any case, you answered my question. +1 – Phil Sandler Sep 15 '17 at 21:17

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