My 66 year old mom is retiring, buying a new house, and considering a reverse mo

[SyZ]

And I have no idea what it is, but the concept of 'you pay nothing each month' seems like a scam. Is it?

Edit: After reading, it seems like something for your property you're already in, not a new property. So you owe $200k, the bank gives you $200k and says you don't owe us anything for X years, but we're going to charge you interest and you have to continue to pay the property taxes. So you then invest the $200k in the market hoping to get more than the interest you paid on your original mortgage, so that in X years when your balance of $400k is due you actually made $550k in the market. Right??

[Choices]

I'm not an expert, but my understanding was that while it can be a lump sum, they more often pay you a monthly amount rather than a huge chunk up front, and that the fees and rates are ridiculous.

This information is usually accompanied by advice to downsize the house instead or take out a normal home equity line of credit at a much better rate, get a big chunk at once, and use some of that to make monthly payments back to the bank on the LOC and use the rest for living expenses.

[kimmarg]

It's not a scam but that doesn't mean it's a good idea for everyone. The usual reverse mortgage situation is you have someone who is elderly-ish (not likely to live beyond the term of the reverse mortgage) who has very little money and a valuable house. Basically the bank buys your house from you over a period of say 20 years, so the bank sends you a 'mortgage' payment every month and at the end of 20 (or however many) years they own the house.  This is a great deal for a broke 75-80 year old who has owned a house for a long time and now has not enough money to live on and a house worth $500k in some crazy housing bubble. They get enough to live on and they can keep living in the house until they die at which point the bank owns the house.

[G-dog]

My understanding is that the house has to be paid off. Of course, they probably find some way to help make that so.
In any event, I would think your mom would need to have a very high level of equity in the property. Not great for everyone, but not horrible for everyone either. It is just a way to get equity out of your house, without having to move out immediately.

[Jim2001]

And I have no idea what it is, but the concept of 'you pay nothing each month' seems like a scam. Is it?

Edit: After reading, it seems like something for your property you're already in, not a new property. So you owe $200k, the bank gives you $200k and says you don't owe us anything for X years, but we're going to charge you interest and you have to continue to pay the property taxes. So you then invest the $200k in the market hoping to get more than the interest you paid on your original mortgage, so that in X years when your balance of $400k is due you actually made $550k in the market. Right??

As your figured out and others have noted, it's for people who are "house rich" and "cash poor", that is, sitting on equity.  She won't qualify for one unless she pays all cash.

A good question for your mom is, "what are you trying to accomplish?"  What are the financial aspects of her situation?  What are her sources of income (pension income, SSI, other), overall savings (cash, investment accounts), withdrawal rate from various accounts.  What are her expenses? Has she sold a house and looking for a replacement?

You don't need to share with us, but understanding where she is and what she wants to accomplish will give you a better chance to help her make an informed decision. 

BTW, a reverse mortgage was the absolute best thing my grandparents did in their later years.  My grandmother wouldn't consider moving and it enabled them to stay in her home of 80+ years until her final days.

[SyZ]

She's looking to sell her property now, that she has (I believe) a mortgage of $230 outstanding on, worth about $540-$550. She wants to then take that and put a sizeable (30-50% possible) mortgage on a 300-350 property in a less expensive area to have a smaller morgtgage (yes, it's CA). She has two pensions coming, SS, 20k in her 401(k), and no other investments. I told her to put 20% down on a new property (she refuses to rent) and invest the majority of the rest of what she makes from the house in index funds to beat keeping it in savings. She stated she doesn't want that much risk because she's worried about medical bills and what not in the coming years. But I don't understand how this reverse mortgage would apply in her situation given 1) she's selling the house with the equity to 2) buy a house she has no equity in, and 3) she already has 3 annuities coming. And what happens if she does this on a 20 year term and then wakes up at 86, still well and alive and now without a house?

[JrDoctor]

It's an expensive way of extracting equity which only works if you die on time.  It will leave little or nothing for the next generation.

[Catbert]

She's looking to sell her property now, that she has (I believe) a mortgage of $230 outstanding on, worth about $540-$550. She wants to then take that and put a sizeable (30-50% possible) mortgage on a 300-350 property in a less expensive area to have a smaller morgtgage (yes, it's CA). She has two pensions coming, SS, 20k in her 401(k), and no other investments. I told her to put 20% down on a new property (she refuses to rent) and invest the majority of the rest of what she makes from the house in index funds to beat keeping it in savings. She stated she doesn't want that much risk because she's worried about medical bills and what not in the coming years. But I don't understand how this reverse mortgage would apply in her situation given 1) she's selling the house with the equity to 2) buy a house she has no equity in, and 3) she already has 3 annuities coming. And what happens if she does this on a 20 year term and then wakes up at 86, still well and alive and now without a house?

They will never "take" the house until she leaves it voluntarily, by death or moving to assisted living.  Even when she leaves if there is still equity in the house, she (or heirs) will get it.  Just like all mortgages she owes what she owes.  The difference is that unlike a regular mortgage where the balance owed keeps going down the balance on a reverse mortgage keeps going up.

It can be used to purchase a house (at least as I understand it).  As others have mentioned you need to figure out what she is trying to accomplish to see if a reverse mortgage is appropriate.  Using it as arbitrage (using cash generated by a reverse mortgage to buy mutual funds) is a foolish game.  In this case she should take her 300k equity and buy a 300k house.  Save the reverse mortgage for the future when she needs to tap the equit for living expenses.

[Jrr85]

It's an expensive way of extracting equity which only works if you die on time.  It will leave little or nothing for the next generation.

Not positive, but I think you have this opposite.  For "traditional" reverse mortgages, they agree to pay you the equity of the house (less some pretty significant fees and basiclly the "rent" for your remaining life expectancy) and in exchange they get the house.  So it only works (at least in a financially beneficial way) if the person significantly outlives their expected life at the time the reverse mortgage is entered into and also is able to stay in their home for that time.   I know there are different flavors though, and maybe this is not really the prevalent model they use, but that's my non-expert understanding of it.   

[dude]

Scott Burns has done several good pieces on reverse mortgages, both positive and negative.  This is his latest (negative):

https://assetbuilder.com/knowledge-center/articles/the-dark-side-of-reverse-mortgages

You can search the site for others.