options of a reverse mortgage

[Steve Kirsch]

Hello BP Peers,

I have a relative who is looking to move and retire to another state from where she resides. She has a condo now with a remaining mortgage of about $100K. The condo's un-appraised value is approx $250K. Her next residence she is wanting to move to will cost around $225K. She is on a fixed income with limited funds in her savings. I am trying to see if she can afford to keep her current condo and rent it for cash flow to support both condos. However, this will hinder her ability to come up with a traditional 20% dp and new mortgage payments. She is being advised to  sell her current condo, pay off the existing mortgage, use the balance to support the 20% dp and then invest the rest in the market where she might receive $400-$500 return monthly for living expenses (too risky in my opinion). Another option is to sell the current condo and apply for a Reverse Mortgage. Then she will not have to come up with a dp. But in this scenario the bank will own the house (especially if she outlives the money from the loan. She is 72 years young. Again, I am suggesting keeping the current condo for cash flow and looking for loan options for the new condo.

Lastly, she is not wanting to put the new condo ownership in her name as it may hinder her in regards to Medicare and Medicaid (her words)?  She wants to have the ownership under the names of her beneficiaries (her children). However, I am concerned with that option as having another asset under their names could negatively affect their ability for future loans (personal, business, college) and increase their annual tax bracket????   Any advise is much appreciated...

[Catherine Coy]

Steve Kirsch wrote:  Another option is to sell the current condo and apply for a Reverse Mortgage. Then she will not have to come up with a dp. But in this scenario the bank will own the house (especially if she outlives the money from the loan.

Steve, the bolded portion of your statement is definitely not true.  Unfortunately, it's one of the many myths surrounding reverse mortgages [RM] that prevents seniors from taking advantage of this great program.  When your relatives passes or permanently vacates the home, her heirs have two choices:  (1) buy the house for 95% of the then-current fair market value, or (2) sell the house.  RMs are non-recourse.  This means that neither she nor her heirs are responsible for the negative balance, if any, remaining on the loan.  Your relative can be upside down in the loan, but that doesn't matter.  The choices are still (1) purchase the house for 95% of current fair market value or (2) sell the house and pay off the loan with sales proceeds.  Of course, if neither of these choices is acceptable to the original homeowner or her heirs, the bank will take the house back, just like any other default.

I strongly urge you to find an experienced RM loan originator in FL and/or the new location and discuss the actual, not mythical, terms of an RM.  It sounds like your relative can sell the FL house and buy another house in a new location and never make another mortgage payment.  Only in America is such a useful outcome possible.

Yes, there's a cottage industry out there to help seniors hide their assets so that fellow taxpayers pay the senior's long-term care bills via Medicare/Medicaid.  They call it "Medicare planning."  Some people have no ethical issues with this plan, but an RM must be held in the name of the senior, so the hide-your-assets strategy won't work in conjunction with an RM.  Besides, there's a 5-year look back with respect to "Medicare planning," so your relative will be 77 before she can legitimately hide her assets.