Can I offer "reverse mortgage" type payment?

[Gary M.]

I have mentioned this deal before: Neighbor needs cash flow, her home is paid for but a reverse mortgage for her small home doesn't give her enough income nor is it worth while with all of the expenses related to doing it conventionally.

Can I buy it and and pay her for it out of... say a HELOC?

Your input is appreciated.

Thanks,
Gary

[Jon Holdman]

I'm not too familiar with the logistics of a reverse mortgages. There are companies around that do reverse mortgages. You might check AARP web site (since these are largely targeted at seniors) and try calling some of these and ask how they work.

I believe the way these work is that it is a loan secured by the property but without payments. The homeowner can either take a lump sum up front, take periodic payments, or some combination. When the homeowner dies, the house either (here's where I'm fuzzy) reverts to the lender, or is sold and the proceeds pay off the lender while the estate gets any remainder.

So, it could be set up simply as a loan, with whatever distribution she needs. Have a deed of trust or mortgage against the property, and a promissory note with the terms. Set some reasonable rate of interest. Since there are no payments, the interest just accumulates back into the loan balance. Like an option ARM with an option for no payment. The agreement should specify what happens on death as far as the lender getting the property in full or selling it and returning the excess (if any) to the estate.

Conceptually, I think these are equivalent to an annuity. If you're not familiar with an annuity, that's an arrangement where someone (the beneficiary) pays someone else (typically an insurance company) a chunk of cash, then gets back a monthly payment. The simplest form is an "immediate, fixed" annuity. Immediate means the payments start coming right away and fixed means the payments don't change. These can be set up as a "single life" payment, meaning it pays until death, or can be set up for a fixed period. And, can be set up for a fixed period with payments to a survivor or death of the beneficiary, which ever is later. Go to http://www.immediateannuities.com/ and you can plug in some numbers and see how it works.

An immediate, fixed, single life annuity is a great deal for the beneficiary (the person paying the money) if they live a long time. Its a bad deal if they die soon. In that case, the issuer gets all the deposit and pays out very little.

You could consider the value of the property to be a "deposit" on an annuity. Figure the value of the property, take the age and sex of the owner, and plug it into the web site to see what an equivalent annuity would pay. For example, a $100,000 deposit for an 80 year old female here in CO would pay out $996 a month. Same arrangement, but with payments for exactly 10 years would pay $1030 a month. With payments for at least 10 years (to a survivor) but with payments to the beneficiary until death would pay out $850 a month.

Another benefit to an annuity is that there are little or no taxes. That's because much of the payment is return of the beneficiary's investment. Any interest accumulates in the account, so until the full amount of the original investment is returned, there is no tax. That's over simplified, but you get the idea.

So, if you're willing to sign up for something like one of those, you could figure out a value, figure out the value of the annuity payments, then set it up legally with a lawyer. You give her the money each month (or quarter, or whatever), and when she dies (or at the end of a fixed term), you get the house.

How you make the payments, I don't know. You would not own the home, so you couldn't borrow against it. Or, maybe you could take the deed with a "life estate" that would allow her to stay there until she dies.

You mention the value doesn't give enough income. That's not a problem you can solve. You're really saying she doesn't have enough assets to support herself. That's unfortunately true for many people. Doing the reverse mortgage for a shorter fixed time would give more money. But, that runs the risk of her outliving the payments, then ending up with no income and no place to live.

Jon