Forbes: Reverse Mortgages Vs. ‘Caregiver Loans’

Like many financial products, reverse mortgages have their pros and cons. But where these loans come up short, alternatives may be able to bridge the gap.

A recent article published in Forbes’ Personal Finance section explores the reverse mortgage basics, informing readers about the various qualifications, requirements, as well as potential advantages and disadvantages of how these loans work.

“People usually use Reverse Mortgages because they provide income in retirement,” writes Forbes contributor Neale Godfrey. “The money can be used in any way you choose.”

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Granted that the money received from a reverse mortgage is regarded as “proceeds” rather than income, which is taxed, homeowners age 62 and older can use these loans to remain living in their home while also generating extra cash flow by borrowing against their home equity.

“This may seem obvious, but you are spending the equity in your home now, and that will lower the future value of your estate in the future, thus leaving less for your loved ones down the road,” writes Godfrey.

For heirs who might be concerned for their inheritance if their parents took a reverse mortgages, an alternative to providing mom or dad with some extra funds in retirement can be through certain peer-to-peer lending programs, particularly a product known as the “Caregiver Mortgage” loan.

Launched earlier this year by Massachusetts-based National Family Mortgage, LLC, the Caregiver Mortgage is an intra-family loan that allows family members to pool resources to provide a flexible line of credit that their aging relatives may be able to receive.

“In intra-family lending, there’s no bank or mortgage,” writes Godfrey. “Family members are the bank.”

For example, if a family decided to use a Caregiver Mortgage with an aging parent, the loan’s flexibility allows for one child/relative to give $500 to their parent each month, whereas another could give $1,000. Family members are repaid pending their decision on what to do with the property in the event of the parent’s death.

As an alternative to a reverse mortgage, the Caregiver Mortgage boasts a lower interest fee, no insurance premium, no age restriction or primary residence restriction, as is the case with Home Equity Conversion Mortgages.

While National Family Mortgage does not lend the money themselves, they handle the paperwork needed to assist with the loan being made between family members.

“This is an interesting situation and one I’d love your family to consider, if the kids can help you out,” writes Godfrey. “I like it because your kids are building equity in your home and not the bank. They may decide to buy each other out when you are gone, instead of selling the family home.”

The Forbes piece, however, does not mention the potential disadvantages that can arise from these types of agreements, particularly if family members suddenly experience cash flow issues and are unable to spare additional funds to their borrowing parents.

Additionally, when RMD first reported on the Caregiver Mortgage in May, readers have commented on other possible areas of concerns, including death or loss of the funding family members; and seniors potentially losing control of the property.

Read the Forbes article.

Written by Jason Oliva

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  • It is far worse than that.

    One of the major benefits of a reverse mortgage is independence. If family members are the lender, the situation can quickly sour especially for the borrower. Imagine if the borrower heard from the lender that for a short period time there will be a shortage in the monthly amount they receive because of a clear need, the senior has recourse when a third party lender is involved but what if the lender is one of their children who just had a significant but temporary cash flow setback.

    This idea that the interest rate will be lower is correct but the overall economic impact to the family lender is distorted. It sounds good but what if that same family member placed that same money in a less risky investment and made an even higher rate of return? Economically, the family member will have more in net assets than by family reverse mortgage lending. Due to graduated income tax rate brackets, even the income tax bill on the accrued interest for a family reverse mortgage would normally greatly reduce the rate of return on that vehicle when compared to investments that get taxed annually.

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