My parents are in good health, though getting on in years. They are fiercely independent and would like to stay in their home as long as possible. However, their home is their biggest asset. It’s probably worth over half a million, and is paid off. They haven’t done so well with their savings, however. (My mom says, “I never expected to live this long!”)
They were looking into getting a reverse mortgage, when it occurred to me—my husband and I have a good sum of money saved for retirement, and it’s not earning much interest. Could we be their lenders, and keep the interest in the family? Is this a good idea? Or should we just make them a straight loan for their living expenses?
Yes, it’s possible to offer your parents a reverse mortgage. In fact, doing so offers many benefits in addition to keeping the money that would be spent on interest within the family. If you took part in your parents’ hunt for a suitable reverse mortgage, you might have noticed that the available ones all sound alike. That’s not a coincidence—institutional lenders (i.e. banks) are constrained by several federal legal requirements.
So, for example, the typical reverse mortgage products on the market come with an age minimum (ordinarily 62) and require that the applicant complete a financial counseling session. They also cap the possible loan amount, based on the applicants’ age and location.
What’s more, institutional lenders tend to charge high closing costs, interest rates, and insurance fees on reverse mortgages. The high setup costs make them not worthwhile for anyone planning to sell the house within a couple of years.
And at the end of the process (typically, when the borrowers sell or one passes away), the loan must be repaid, with interest—taking a big bite out of the home equity that your parents built up over the years. Worse yet, if your parents are unable to repay the loan when it comes due (for example, after one spouse dies), or they get into financial difficulty and can’t pay for needed repairs or homeowners’ insurance, the lender can foreclose.
By structuring a reverse mortgage loan within your family (an “intrafamily” loan) you can offer your parents flexibility as to eligibility and loan-amount requirements, spare them the mandatory counseling session, and keep the vast majority of the home equity and interest money within the family (though you should expect to pay setup and/or administrative costs to lawyers or other service providers).
The advantage of arranging this as a reverse mortgage instead of an ordinary loan is that it’s a low-risk investment for you, too, backed up by the house itself. Of course, if your parents let the house fall into disrepair, then your collateral isn’t quite so valuable—but at least they’ll have more money with repairs than had they turned to an institutional lender.
The trick, of course, is structuring the loan in a way that meets legal requirements, serves your and your parents’ interests, and takes into account both estate-planning issues and the interests or concerns of your siblings, if any. See Key Steps in Making an Intrafamily Reverse Mortgage Loan for more information.