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A private reverse mortgage can be a component of estate planning

An estate plan allows you to decide who the beneficiaries of your estate will be and which assets each beneficiary will receive. Estate planning also enables you to help achieve financial security during your retirement years. Wills, trusts, durable powers of attorney and health care directives are typically the instruments thought of as being estate planning tools. Another estate planning tool can be a reverse mortgage.

Reverse mortgages have become popular over the past several years. As observed on the NJ.com website, retirees frequently take out a reverse mortgage after finding out that they need more money in retirement than they originally anticipated. Indeed, a reverse mortgage is sometimes the only viable option for retirees who-perhaps because of high medical bills-suddenly find themselves strapped for money.

Some retirees who might benefit from a reverse mortgage hesitate to obtain one due to their desire that their homes be left to their kids when they die. As reported in the New York Times, since a reverse mortgage loan must be repaid once the borrower dies, a retiree’s heirs typically end up having to sell the family house.

The Fox Business News website reports that there is an alternative that allows retirees to tap into the equity in their homes and still be in a position to achieve their estate planning goal of passing their home on to their children unencumbered by a financial institution’s lien. That alternative is that, in lieu of parents obtaining a commercial reverse mortgage loan, one or more of their children could privately finance the loan. This private reverse mortgage loan would be secured in the same manner as would a commercial reverse mortgage. The loan could be in the form of a lump sum payment, a line of credit or monthly payments made to one’s parents.

The advantage of a private reverse mortgage is that retired parents can avoid having to pay lending fees associated with a commercial loan. As noted in an article published in Consumer Reports, typically, the costs associated with an intra-family loan are a fraction of what they would be had the retiree taken out a traditional reverse mortgage loan from an institutional lender. Moreover, after their parents die, the children who made the intra-family loan inherit the house free from an institutional lender’s lien.

Feasibility of a PRM

The Bankrate website notes that a private reverse mortgage may not work for everyone. Children who are considering a private reverse mortgage need to assess: (1) how much money their parents need; and (2) whether they can actually afford to provide it. Once the numbers are crunched, it may turn out that an intra-family loan is not financially feasible. Often, a retired couple’s adult children simply have too many financial obligations of their own to be in a position to fund a private reverse mortgage.

Second, even if they can afford to fund a private reverse mortgage, children will wish to protect their financial bottom line by evaluating the home to determine its worth before making a loan. Finally, the children who will be funding a reverse mortgage might wish to communicate their plans to other family members since business transactions within a family can be sensitive subjects which can threaten to disrupt family harmony.

Seeking legal advice

If you think that a private reverse mortgage could help you better achieve your estate planning and financial goals, you should speak with a New Jersey attorney experienced in estate planning.