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Posted by Bobbi in CT on 5/13/05 7:17pm
The most recent seminar (attorneys, bank VPs, loan officers, financial planners) do NOT recommend using a reverse mortgage as an investment tool. The variable interest rate starts high and can get higher as time goes on. If HUD backed (average person's home), the up front frees are "Really High" as quoted by loan originators. According to them, "do the math" negative return on investment because the mortgage rate will always be higher than anything you can earn on the investment. I don't remember the examples, but they mathmatically proved this with two real-life loan scenarios. It's not the purpose of the cash-out/no payment loan product; spend the money on yourself and day-to-day needs to improve "quality of life".
Most practical and best uses have been quality of life (repairing home, vacations, new(er) car, breakfast at McDonald with the girls after church on Sunday [LO did one for an elderly woman who could no longer afford the $3 because fixed income and rising cost of living, gave her a little extra each month for breakfast out, senior citizen trips, furnace repair and paint the house]. Another example was a couple who purchased a new second home in Florida mortgage free (which goes to the kids ) because the principal residence wasn't going to be kept by family after death anyway - also gave family a "vacation home" to enjoy now. Purchasing long term care insurance and using extra $$ per month was another option.
One example give from a loan officer (who has a masters in gerontology and specializes in only these type of loans), was a $312,000 (based on HUD cap with $34,000+ closing fees) reverse mortgage: $75,000 paid off existing morgage with monthly payments, there's a reserve amount for monthly $30 fee and a few other costs, remaining $$ is in a HELOC that Earns a variable rate of interest on balance in account. Elderly borrower then took dream-of-a-lifetime cruise with adult child (paid for both of them) and draws $200 per month from HELOC to meet "comfortable" cost of increased living expenses plus no longer has to worry about how to make mortgage payments.
It's a specialized product and doesn't work for all, but under the right circumstances can good for "quality of life" or tax and estate planning. Key is the money isn't "income" so it is not taxed as income - just have the "extra" you need automatically moved from HELOC to your checking account each month. Except for the Weathly High-End homeowner product, the HUD-backed products have a cap based on the county and state the home is in. No requirements on what you can do with the cash if you get the loan - could blow it all at the casino if you wanted.
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