When is a Reverse Mortgage a Good Option?

rev mortgageGetting 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.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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