Are ‘Intra-Family’ Loans More Flexible Than Reverse Mortgages?

Reverse mortgages aren’t for everybody. But for some potential borrowers worried about the perceived high costs associated with these loans, the “intra-family” mortgage may be a lower-cost alternative. Though, just like with any loan product, this speciality “mortgage” comes with its own unique set of advantages and risks.

There are many risks involved when navigating a reverse mortgage, but there is a lower-cost alternative out there: the intra-family mortgage, or the ‘caregiver loan’. Though, just like with a standard reverse mortgage, an intra-family mortgage comes with its own unique pros and cons.

In an intra-family mortgage, one or more of a person’s adult children or other relatives play the role of the lender, according to a recent article from Kiplinger.

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This method bypasses the government in favor of a less-expensive option by evading some of the costs, borrowing limits and other restrictions that come with a HECM.

The idea was brought to light last year by Boston-based National Family Mortgage who provides this service. Though the company doesn’t provide the funds for the loan, it simply helps with the paperwork and tracking disbursements online.

National Family Mortgage charges $2,500 for the service, a large savings compared to a HECM, which can charge origination fees as high as $6,000, writes Kiplinger.

Other added benefits of the intra-family mortgage include the absence of mortgage insurance premiums and lower interest rates than those given in a standard reverse mortgage. This type of mortgage also doesn’t limit your borrowing based on age, home value or current interest rate, like a standard reverse mortgage does.

A downside to this type of mortgage is that because the funds aren’t coming from a lender, they may not always be there when the borrower needs it, the article explains. The family member lenders usually have all of the control of the funds and can change them at any time. Also, because the loan generally has no borrowing limit, lending family members take a big risk in potentially not being paid back in full.

“Baby boomers are trying to save for their own retirement and save for their kids’ college, and they want to help their parents too, but need to be repaid,” said Charlie Douglas, board member at the National Association of Estate Planners and Councils, to Kiplinger.

Before settling on any loan, be it a reverse mortgage or intra-family mortgage, Douglas suggests considering certain alternatives such as a home equity line of credit or downsizing. If a person’s home needs many repairs or costly improvements, he says, “it may be better to go ahead and sell the home.”

Read more at Kiplinger.

Written by Alana Stramowski

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  • Where these instruments are most helpful is where certain family members can help the parents and others cannot. In that case, especially where the need is expected to exceed the monies available through a HECM, at least the child providing the funds can expect a percentage of the monies provided to the parents to be returned in some cases with interest. It is also useful where the parent cannot qualify for a HECM due to financial assessment or must have a LESA to qualify.

  • Sure sounds good, borrowing money from your son, daughter, sister or brother or even other relatives. Sure should be a lot cheaper way to go, isn’t it?

    There is a lot to think about going this rout, how many parents want to go to their children to ask them to borrow money, not to many I would think!

    I can’t see the logic behind this “Intra-Family Loan”. Sure the savings can be extraordinary but what about the dignity of the senior? If the senior borrower can qualify for a reverse mortgage, in my opinion, that is the way to go! I know that is what I would do!!

    Don’t get me wrong, if there is no other way, than that is a different story all together.

    John A. Smaldone
    http://www.hanover-financial.com

  • I think we owe it to our borrowers to be familiar with the “intra-family” mortgage concept and companies like National Family Mortgage that can facilitate such loans.

    For reasons cited elsewhere, an intra-family mortgage has its own set of pitfalls and (IMO) is seldom a better alternative to a HECM loan. In some select cases, however, it makes sense. We become more valuable to our clients and, especially, to our professional referral partners if we recognize those select cases and at least suggest the intra-family loan as a possible alternative for consideration.

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