Advertisement
retirement

All in the Family Reverse Mortgages

An intra-family loan can be a cheaper and more flexible option, but there are risks for both the borrowers and family lenders.

There's a new question for anyone considering a reverse mortgage: Should you keep it all in the family?

Many senior homeowners use reverse mortgages to borrow against their home equity, withdrawing cash to help cover everyday living expenses, pay unexpected medical bills or make home improvements. Typically, these homeowners obtain a Home Equity Conversion Mortgage, which is insured by the federal government and issued by a government-approved mortgage lender.

Advertisement - Article continues below

But a growing number of seniors are bypassing the government's program in favor of a cheaper, more flexible option: An intra-family reverse mortgage. With this type of loan, one or more of your adult children or other relatives play the role of lender.

By making your reverse mortgage a family affair, you can keep your home in the family and sidestep some of the costs, borrowing limits and other restrictions that come with the HECM. But you also run the risk that a job loss or other financial hardship will prompt your family lender to back out of the deal, leaving you without the cash you need.

Despite the risks, intra-family reverse mortgages are gaining popularity as more seniors aim to "age in place" and their children struggle to help them financially. "Baby boomers are trying to save for their own retirement and save for the kids' college," and they want to help their parents, too, but need to be repaid, says Charlie Douglas, board member at the National Association of Estate Planners and Councils.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

National Family Mortgage, a Belmont, Mass.-based peer-to-peer lending company, last year launched an intra-family reverse mortgage. The company doesn't disburse funds, but it helps families draft paperwork and track disbursements online.

An intra-family loan can be a more accessible option than a federally insured reverse mortgage. The HECM requires that a homeowner be 62 or older, live in the home as the principal residence, attend a counseling session, and demonstrate the financial wherewithal to pay property taxes, insurance and other ongoing costs. An intra-family loan, however, has no age or counseling requirements or strict financial qualifications, and the loan can be obtained on a vacation home or other investment property.

A Loan With Fewer Costs

An intra-family loan can also be far cheaper than a traditional reverse mortgage. With a HECM, origination fees can be as high as $6,000, and borrowers must pay a number of other fees that typically include the cost of an appraisal, title search, inspection and mortgage insurance premiums. But it may cost only $2,000 or $3,000 to have a lawyer set up an intra-family reverse mortgage. National Family Mortgage charges $2,500 for its service. You don't have to pay mortgage insurance premiums, and your interest rate will likely be lower than the rate a mortgage lender would charge. In an intra-family loan, the interest rate must equal or exceed the IRS-set "applicable federal rate," which was about 2.2% for long-term loans in April.

Advertisement - Article continues below

But there's a big risk for borrowers: The money may not be there when they need it. The family lenders typically have complete control over disbursing the funds and can change the disbursement each month or eliminate it altogether. "The lender cannot be legally compelled to make the credit line available," says Timothy Burke, National Family's chief executive officer.

Family lenders also face risks. Unlike the HECM, which has borrowing limits based on your age, home value and the current interest rate, an intra-family loan generally has no borrowing limit. That raises the risk that the lender may not be fully repaid, says Harry Margolis, a Boston elder law attorney who has set up intra-family reverse mortgages for clients.

Before setting up any type of reverse mortgage, consider alternatives such as a home equity line of credit or downsizing. If your house needs many repairs or costly improvements, Douglas says, "it may be better to go ahead and sell the home."

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Shrink Your RMDs in 2021 and Beyond
annuities

Shrink Your RMDs in 2021 and Beyond

QLACs are a special type of annuity that lets you cut RMDs from your IRAs next year and beyond, reduce the taxes you pay and guarantee more lifetime …
August 6, 2020
How a Second Stimulus Check Could Differ from Your First One
Tax Breaks

How a Second Stimulus Check Could Differ from Your First One

The HEROES Act, which was passed by the House in May, would authorize a second round of stimulus checks. While the new payments would be similar to th…
July 22, 2020

Recommended

Drawing Down Retirement Savings in a Pandemic
Coronavirus and Your Money

Drawing Down Retirement Savings in a Pandemic

Tapping the right accounts at the right time matters. Knowing how much a retiree can spend each year without running out of savings in old age is even…
August 7, 2020
6 Money-Smart Ways to Spend Your Stimulus Check
Tax Breaks

6 Money-Smart Ways to Spend Your Stimulus Check

If you don't have to use your stimulus check for basic necessities, consider putting the money to work for you. You'll thank yourself later.
July 30, 2020
Emergency Funds: How to Get Started
Making Your Money Last

Emergency Funds: How to Get Started

There’s no one-size-fits-all formula for how much you’ll need.
July 30, 2020
The Finances of Homeschooling Your Kids: What It Costs, Tax Breaks, More
spending

The Finances of Homeschooling Your Kids: What It Costs, Tax Breaks, More

If you're contemplating homeschooling for the 2020-2021 school year and beyond, consider these 10 things -- from surprising homeschooling costs to pot…
July 30, 2020