New Trends

New Way to Help Your Parents Stay in Their Home

Pros and cons of the reverse mortgage program for families

By Kenneth Harney Real Estate Writer June 5, 2015

It’s a quandary many families face: Mom and Dad, now retired, need more money to live on and want to <a remain in their home but are wary about signing up for a traditional reverse mortgage with a bank. (Yesterday, the federal Consumer Financial Protection Bureau released a cautionary report on these loans and their advertising.)

Now there’s a new option for people in this position: a family-funded reverse mortgage that’s custom-tailored to the needs not only of Mom and Dad but to the needs of one or multiple relatives who’ll serve as lenders.

Before I lay out the pros and cons of the Caregiver Mortgage National Family Mortgage — a line of credit secured by the home — let me offer a brief explanation of reverse mortgages and how they work.

How Reverse Mortgages Work

A reverse mortgage provides cash payments to a homeowner age 62 or older in the form of either periodic disbursements or a lump sum, based on their age and home equity. Traditional bank-funded reverse mortgages make the payments as long as the borrowers live in the house. Once a borrower dies or moves out, the house must be sold and the bank then often takes large chunks of the sale proceeds in the form of compounded interest, repayment of all disbursed funds and fees.\r\n<p class=\”pull-quote\”>Intra-family lending has no credit score requirements, debt-to-income ceilings or other hurdles that are typically part of bank lending.

The new Caregiver non-bank reverse mortgage, by contrast, keeps all the funds lent — and all interest accrued — inside the family. National Family lends no money itself, it provides the legal framework (documentation, recording of liens, record-keeping, and servicing) needed to make family-funded loans legitimate financial instruments, compliant with Internal Revenue Service (IRS) and state rules.

In an intra-family loan transaction, family members — children, grandchildren, aunts, uncles — can pitch in to lend money or a single-family member can take on the role of the sole lender.

Advantages of Intra-Family Lending

Intra-family lending has four advantages, provided the family members can pull together the necessary resources:

  1. Interest rates and other terms can be far more favourable than what banks offer.  The minimum interest rate must only meet or exceed the IRS’s “applicable federal rate” or AFR. Currently, the minimum AFR for “long-term” financing such as mortgages is 2.47 percent.
  2. There’s no minimum age requirement for the homeowner.  Traditional reverse mortgage borrowers must be 62 or older, but the Caregiver Mortgage can be done at any age.
  3. Intra-family lending has no credit score requirements, debt-to-income ceilings or other hurdles that are typically part of bank lending. By contrast, the dominant commercial reverse mortgage program has begun requiring reverse mortgage applicants pass new, tougher qualification tests has lowered maximum loan payout amounts and continues charging high insurance fees. Similarly, home equity credit lines from banks, another popular source of cash for older Americans who want to remain in their homes, typically require a full battery of creditworthiness, financial reserves and strict loan-to-value limits as part of the qualification process.
  4. The home can stay in the family. With a traditional reverse mortgage, the home must be sold or the mortgage must get paid off when the owner dies or moves. With the Caregiver Mortgage, the family members can hold onto the house. CareRelay we would say there is a 5th thing you need to do for yourself as a caregiver and your parents use our solutions for managing the oversite of medical, financial, legal and home items that you are to busy to manage.

How a Caregiver Mortgage Might Work

What does a Caregiver reverse mortgage look like? How much money, and on what schedules, do the family lenders send to Mom and Dad? That’s entirely up to the participants, and National Family provides a helpful calculator on its website allowing prospective customers to run hypothetical scenarios. Let’s say, for example, that Mom and Dad could use an extra $2,500 a month to supplement their income and that none of their grown kids can afford to lend out that much individually, but together they can manage to pool that amount.

So they contact National Family after deciding among themselves what interest rate to charge — say 3 percent, which is better than what this lenders-to-be are getting on their bank deposits or money market funds. The family also decides who will contribute how much — one sibling might be able to afford $500 a month, another can only spare $250 and a third can make up the $1,750 monthly balance.

Then they begin drawing up basic documents with National Family’s assistance. They spell out everybody’s obligations and their eventual proportional split of the home equity. They include contingency language for events like the inability of a family co-leader to continue making contributions or Mom and Dad’s failure to pay property taxes and insurance premiums (which is their obligation under the terms of the loan).

For its services in setting all this up and registering the intra-family reverse mortgage with local officials, National Family charges a one-time fee of $2,500.

Some Potential Downsides

Are there potential downsides for the participants in a Caregiver reverse mortgage? Definitely. Though National Family helps draw up the documents and advises the co-leaders and borrowers, the family members must police themselves to make certain the funds keep flowing as promised. If a sibling runs into financial problems down the road, someone else in the family will have to pick up the slack. To help deal with that possibility, consider creating an escrow account for unexpected payment interruptions, deaths, and illnesses.

There’s also the possibility that Mom and Dad live extra-long lives but their home value stagnates or declines. That could mean the co-leaders won’t get all their money back.

As with all reverse mortgages, consult a knowledgeable attorney, CPA or another financial adviser before plunging into one of these intra-family deals. That way, you’ll help ensure that you’ll be assisting your parents, not causing a family rift.

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Family Care Story

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Keeping Mom at home for the long-term is challenging for many, this is a story shared by one of CareRelay’s early users.

By early 2000 it was clear to my two sisters and me that our dear mother had begun her descent into the abyss of early-stage dementia. The best memories of my mother were of a woman who was active in so many ways. A lover of the fine arts and an avid walker who, while never having owned a pair of sneakers in her life would often go for 10K walks in some form of street shoes. She never drove a car but traveled the world with an unquenchable thirst for adventure, discovery and new experience.

During her initial period of cognitive decline, I consulted a medical specialist who met with my Mom and conducted an extensive interview. She recommended that if we were able, Mom should continue to “live at home” in the apartment she had lived in for over thirty years. The professional recommendation based on recent studies determined that seniors with our mother’s cognitive level will decline much faster if moved from their familiar home environment to a new residence.

My two sisters and I accepted the doctor’s recommendation and decided with some additional help we would keep Mom at home for as long as possible. One of my two sisters had moved away over thirty years ago to a city several thousand miles away. While she was caring and concerned, she was not available to actively participate in the day to day challenges that lay ahead. As the only son, I did what I was able to do, however, it was my oldest sister who stepped up, became the primary caregiver and managed this demanding situation with love and unshakable determination to provide the best possible care and attention to our mother.

My sister is not a follower of technology and to this day does not have a cell phone. Communication was maintained by landline. I know that the five or so years leading up to our mother’s death were demanding and exhausting for my sister. Attempting to communicate updates and share duties and responsibilities was time-consuming and complicated.  My sister must have felt like she was running an unending marathon while carrying a very heavy pack on her back.

Since our mother’s passing the technological waves of disruption and innovation have washed over the world and new online tools coupled with the immediate help that they provide significantly reduce and help to manage the challenge faced by caregivers around the world.

CareRelay Early Adopter

Now so many years after their mother’s passing our early adopter is using the app for themselves. They are not at the stage that they need help from their children, but the aging caregiver is having health issues come up, and with the CareRelay app they can keep track of them easily in one place and share with family as needed. As back up in case of emergency the spouse and children have all the information they might need on hand.

The CareRelay application was designed and created for families everywhere. This revolutionary app is now available to help simplify, coordinate and distribute care giving responsibilities to a degree previously unimaginable. With little more than a “click”, the most demanding activities that now form the new caregiver’s responsibilities, are distributed among the care team, often a combination of family, friends, and professionals regardless of where they are located or what they are doing.