Family-Funded Reverse Mortgage Loans an Option for Some?

NewImageA recent Fox Business article on reverse mortgages outlines the way in which a family member can finance a reverse mortgage loan for an eligible borrower, rather than going to a financial institution for funding. The article says the cost of the loans—including the HECM Saver—may drive borrowers to seek a family lender instead.

“Adult children or other willing family members with sufficient means can finance a private reverse mortgage. With the loan secured by a deed of trust, the cash can be paid in a lump sum, a line of credit or monthly installments, just like a reverse mortgage from a commercial lender,” the article explains. “The loan must be documented and filed with the Registry of Deeds. A certified public accountant or an estate planning attorney can handle the paperwork.”

The article outlines a potential cost scenario including upfront fees, then offers a contrasting scenario under which the borrower uses funding from children, rather than from a traditional lender, citing a Consumers Union report on intrafamily loans.

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“Keeping the loan in the family can make tapping into the home’s equity more affordable, but too much of a bargain might make the family member-lender susceptible to the gift tax,” the article advises. “To steer clear, make sure the interest rate at least matches the applicable federal interest rate, or AFR. The Internal Revenue Service updates applicable federal rates on its website monthly.”

The option isn’t for everyone, the article cautions. “The Consumers Union advises that the family first needs to assess how much money the homeowner needs and whether the potential family lenders can afford to provide it”

Read the entire Fox Business article.

Written by Elizabeth Ecker

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  • When it comes to estate matters and the potential problems which can develop between heirs, the advice given by Consumers Union is highly unrealistic and inviting trouble. They apparently have little idea regarding the myriad of problems which can arise from the advice they render.

    For example, there are three children in the family and one is affluent. The family agrees that the affluent child should help the parents rather than going to Security One Lending (yeah, it’s a plug). They do exactly as Consumers Union suggests and get the note written up by an attorney who gets the trust deed and note recorded. The affluent family member loaned the parents a total of $200K upfront.

    At the time the loan became due exactly ten years later, the parents had passed away and their home was dilapidated and only worth $180,000. The parents had savings, a small stock portfolio, a car, family jewelry, and some other personal property worth about $60,000 when the last surviving parent passed away. The parents had promised much of the personal property to all three children in equal amounts in their wills.

    When the children found out what the home was worth they were taken aback. Then the affluent son explained that after fix up costs and selling expenses, all he would see is about $160,000 from the sale of the home. Then he began explaining that with a rate of only 4% fixed, the loan had grown to over $298K. On top of that it turns out the note was recourse and he would be taking all of the personal property plus the house to pay off the loan and all of the time he would still be short over $78,000 of what was due.

    The family is now in an uproar declaring that is not what the parents had said about dividing things according to the will. Now the affluent son points out that after tax, all he would see is about $13,000 more than the amount he had loaned the parents. Then he points out that if he had invested his money with the rest of his funds, his tax accountant had made it clear his net return would have been over $195,000 (an after tax total of over $395,000 including his initial investment).

    Now no one is happy. They are all sour they did the deal. If they had gone with Security One Lending (yeah, another plug), they would have lost the house but the affluent son would have his $395,000 (instead of only $213,000) and each of them would have received their share of what it was their parents wanted them to have. So the moral of this story is to go to Security One Lending (the final plug) rather than listening to Consumers Union and doing a family reverse mortgage.

    As someone who has done a fair share of estate planning AND seen its results, there are far more negative stories about trying to help family members to every one that actually works out. The question is how do they sue Consumers Union for its bad advice?

  • When it comes to estate matters and the potential problems which can develop between heirs, the advice given by Consumers Union is highly unrealistic and inviting trouble. They apparently have little idea regarding the myriad of problems which can arise from the advice they render.

    For example, there are three children in the family and one is affluent. The family agrees that the affluent child should help the parents rather than going to Security One Lending (yeah, it’s a plug). They do exactly as Consumers Union suggests and get the note written up by an attorney who gets the trust deed and note recorded. The affluent family member loaned the parents a total of $200K upfront.

    At the time the loan became due exactly ten years later, the parents had passed away and their home was dilapidated and only worth $180,000. The parents had savings, a small stock portfolio, a car, family jewelry, and some other personal property worth about $60,000 when the last surviving parent passed away. The parents had promised much of the personal property to all three children in equal amounts in their wills.

    When the children found out what the home was worth they were taken aback. Then the affluent son explained that after fix up costs and selling expenses, all he would see is about $160,000 from the sale of the home. Then he began explaining that with a rate of only 4% fixed, the loan had grown to over $298K. On top of that it turns out the note was recourse and he would be taking all of the personal property plus the house to pay off the loan and all of the time he would still be short over $78,000 of what was due.

    The family is now in an uproar declaring that is not what the parents had said about dividing things according to the will. Now the affluent son points out that after tax, all he would see is about $13,000 more than the amount he had loaned the parents. Then he points out that if he had invested his money with the rest of his funds, his tax accountant had made it clear his net return would have been over $195,000 (an after tax total of over $395,000 including his initial investment).

    Now no one is happy. They are all sour they did the deal. If they had gone with Security One Lending (yeah, another plug), they would have lost the house but the affluent son would have his $395,000 (instead of only $213,000) and each of them would have received their share of what it was their parents wanted them to have. So the moral of this story is to go to Security One Lending (the final plug) rather than listening to Consumers Union and doing a family reverse mortgage.

    As someone who has done a fair share of estate planning AND seen its results, there are far more negative stories about trying to help family members to every one that actually works out. The question is how do they sue Consumers Union for its bad advice?

  • “Mom and Dad, I’ll help you out financially but I want a mortgage on the family home with interest”. I suppose this already happens, but rarely.

  • “Mom and Dad, I’ll help you out financially but I want a mortgage on the family home with interest”. I suppose this already happens, but rarely.

  • “Mom and Dad, I’ll help you out financially but I want a mortgage on the family home with interest”. I suppose this already happens, but rarely.

  • Mr. Neumeyer,

    Many times we are so wrapped up with our own prospects we lose sight of the bigger picture. While I sympathize with your statements, Consumers Union is not speaking to the vast majority of our customer base.

    The customer base of Consumers Union is active consumers who are looking to get a good deal and can afford their services such as the cost of Consumer Report. Most of their customers in the senior market are the more affluent. Their writing is not addressed to most of the people we work with. They generally agree that financially destitute home owning seniors probably do need the help of a HECM.

    Who Consumers Union is addressubg and recklessly spoiling are the seniors who compose over 70% of the senior market. Even though most of the authors of these kinds of stories are well educated and understand the basic framework of what they espouse, their practical exposure to such situations is very, very limited. Many times it is limited to things they hear from friends and, of course, their own families.

    Like many so called financial advisors, the authors have some great ideas but have no experience seeing it applied and have no or little accountability for how their plans actually come into fruition. Experience and accountability combined with pre-existing knowledge are far greater teachers than instructors of knowledge alone. While they may be learned, their learning from application and accountability in the area of family support for seniors is very, very limited.

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