Getting cash out of your home through a reverse mortgage is costly. For some, the solution might be turning to a family member with significant financial means using a private reverse mortgage, instead of a lending institution. While it is not a common practice, a family based reverse mortgage can be a viable investment and lending opportunity.
A private reverse mortgage loan is secured by a deed of trust, with the cash paid in a lump sum, a line of credit or monthly installments, just like a reverse mortgage from a commercial lender. The loan must be documented and filed with the Register of Deeds and paperwork can be handled by a certified public accountant or an estate planning attorney.
Many financial advisers and estate planners regard the conventional reverse mortgage as a choice to be considered only when there is no viable alternative, noting that if an individual can’t refinance on their own when rates are low, or the option of a family based reverse mortgage is not available, a traditional reverse mortgage can be a last resort. Inter-family loans have several advantages over conventional reverse mortgages. The cost up front can be much lower, while the amount of equity homeowners can pass on to heirs is higher. Taking advantage of a family reverse mortgage also makes utilizing a home’s equity more affordable. However, it is important to discuss this with a trusted advisor to ensure that you are not susceptible to a gift tax.
Traditional reverse mortgages are a costly endeavor up front. Not only will the mortgagee pay a loan origination fee that typically equals 2 percent of the first $200,000 of the home’s value and 1 percent of the remaining balance (the total is capped at $6,000), they will need to add another 2 percent of the home’s value for the initial mortgage insurance premium, plus $1,000 or more for additional costs including appraisal fees and title insurance.
A private reverse mortgage may not work for everyone. First, the family needs to assess how much money the homeowner needs and whether the potential family lender can afford to provide it. Additionally, because business transactions within a family can be tricky, communicating with other family members about the plans is also important. If the lending family member wants to sell the property at a later date, but other family members who hold the remaining interest in the home object, this could cause family disputes and conflict.
In the end, a private reverse mortgage could be a viable investment choice and offers a way to help a family member in need. However, it is important to make sure that you explore all options with a trusted professional to ensure that this is the right opportunity for you.