Could there be a way to help senior homeowners with their cash flow needs without saddling them — and ultimately their families — with high costs?
That’s a key question at a time when millions of seniors are flooding into their post-retirement years, many of them with equity in their homes but insufficient income to handle expenses over the long term. If they want to stay in their homes, they can opt for a government-insured reverse mortgage, which may provide them cash in exchange for repayment plus interest after they die, move out or sell. Or they can apply for a home equity line of credit from a bank.
But there are problems with both choices. The dominant government-insured reverse mortgage program comes with high upfront lender fees, mortgage insurance premiums and newly toughened financial qualification requirements. A home equity credit line may be difficult for seniors to obtain because they cannot qualify on credit or debt-to-income grounds in today’s stricter underwriting environment.
As of May 1, however, some seniors have a new option — one that ties into increasingly popular “peer-to-peer” lending. It’s a family-funded reverse mortgage known as the “Caregiver” loan. It allows any number of children and grandchildren to pool resources to provide a flexible line of credit at interest rates far below what commercial reverse mortgage lenders charge and with far fewer hassles. In intra-family lending, there’s no bank or mortgage company. Family members are the bank.
Here’s a simplified example: Say you and two siblings want to help Mom and Dad, who are now in their late 70s. You and your siblings are all doing well enough that you have at least some cash to spare. Ultimately, you want to retain your parents’ house for the estate once your parents pass away, keep costs to a minimum, and only sell the property when you, not a faraway bank, choose to.
So you sit down with Mom and Dad and determine that, at least for the foreseeable future, they will need about $1,500 in additional income a month. You and your siblings agree to apportion the payments among yourselves in some way, maybe a commitment of $500 a month each for a period of years.
You also pick an interest rate that achieves a win-win result for you and your parents — say 3 percent annually. That’s much lower than a commercial lender could charge but higher than what you’ve been earning on your bank deposits or money market funds. There are no required fees upfront — hey, it’s Mom and Dad.
What you need at this stage is help with putting all the details of your agreement into a legally binding reverse mortgage, recordable at the local courthouse. Enter National Family Mortgage, a Massachusetts-based company that has helped facilitate and service nearly $290 million in intra-family home loans in recent years — typically parents helping kids buy first homes. Now National Family is expanding its menu to include reverse mortgages.
Timothy Burke, founder and CEO, says the “Caregiver” concept is in response to requests by existing clients to come up with a plan that helps with the financial needs of the post-retirement years. National Family does not loan money itself. Instead it helps structure and customize lending arrangements among relatives — documentation, accounting, recordation, closing and servicing for home loans made by relatives who wish to “keep the money in the family.”
For reverse mortgages, it offers step-by-step assistance online plus a calculator that allows participants to see how various contribution and disbursement arrangements would play out over time. National Family’s fee for its services: a flat $2,500.
Can there be complications and downsides to an intra-family reverse mortgage? Absolutely. Though agreements can be custom-tailored to almost any family’s needs, the fact remains that family members don’t always agree and don’t always get along.
To handle this, the loan documents structured by National Family can make provisions for various eventualities — individual co-lenders might have to drop out or reduce their contributions. Mom and Dad might forget to pay their property taxes or homeowner insurance — somebody needs to be in charge of handling unexpected expenses.
Though not mandatory, Burke recommends that total loan commitments not exceed 65 percent of current home value, and that all participants consult with professional financial advisors before signing on.
Does this sort of deal work for every family? Hardly. But if you think it might fit for yours, check out the details at www.nationalfamilymortgage.com.
Kenneth Harney is executive director of the National Real Estate Development Center.