Reverse mortgages, in which retirees borrow against their homes to create an income stream during retirement, typically are funded through brokers and financial institutions.
However, under the right circumstances, a wealthy family member can take the place of the brokers and institutions and finance a reverse mortgage for close family members. For lack of a better term, call it a privately financed reverse mortgage, or perhaps a do-it-yourself reverse mortgage.
Travis Perry, a Grand Junction attorney, assisted some clients who wished to set up such a private arrangement between an individual and his retired parents.
“This circumstance worked out well because there was a family member who had done well (financially) and had significant cash savings,” Perry says. With that savings, a loan for the parents was created and structured as a reverse mortgage on their home. In a reverse mortgage, the borrowers receive regular payments from a loan on their home, and the lender receives repayment when the home eventually is sold.
Perry says the arrangement in this particular case utilized a deed of trust on the real estate and a promissory note. A loan agreement spelled out details of the deal. The loan carried the going rate of interest on mortgages at the time the deal was closed, and Escrow Specialists of Grand Junction handled the financial arrangements.
“What we avoided were the majority of closing costs,” Perry says. Among the costs of the transaction were attorney’s fees and escrow costs, but most other typical closing costs were avoided, which resulted in a “significant savings,” he says.
“It’s kind of a win-win,” Perry says, pointing out that the borrowers received a low-cost loan at a competitive rate, and the lender received a competitive rate of return on his money.
Perry cautions, however, that such an arrangement for a reverse mortgage is rare and works only when a good relationship exists between the borrower and lender. “The perfect elements to come together haven’t appeared too often,” he says. “But this is a good alternative in the right circumstances.”
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