Business

<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, June 10, 2007 Reverse mortgage keeps home in the family Tom Kelly / Herald columnist Reverse mortgages definitely are on the rise. Senior homeowners are taking equity out of their long-time residences to make ends meet during their retirement years, remodel their homes and help their children and grandchildren with the financial challenges of higher education. In fact, the Home Equity Conversion Mortgage, insured by the federal government and the nation's most popular reverse mortgage, jumped from 43,081 closings in fiscal 2005 to 76,276 in fiscal 2006. As reverse mortgage funds are spent and the interest on these mortgages accrues, the lender gains a greater piece of the home. But let's consider another possibility. What if a family member, or a close friend, received that equity instead of the lender? Circle Lending, an aptly named, Waltham, Mass.-based company specializing in the organization of family and small business loans (www.circlelending.com), has introduced Family Advantage, a sort of reverse mortgage that keeps the home in the family - or with a friend or associate - once the senior homeowner moves out or dies. "It's not for everybody, but it has filled a niche, especially for some adult children who are already supporting their parents," said Jim Smith, vice president of marketing and sales for Circle Lending. "It puts the arrangement into a business deal where all family members can see that it's all documented and very clear." Conventional reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender - either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private jumbo reverse plans also have been available. The Family Advantage concept requires a family member, or friend, to write a check every month - or make a lump sum payment - to the parent or homeowner. In return, the person writing the check earns an equity interest in the home, plus interest, when the homeowner moves out. It's basically a home equity loan funded by a family member, or friend, secured by real estate. Hence, payments are received tax-free. The challenge is locating a family member, or friend, with the means to play the bank. According to Circle Lending, the average rate negotiated between the two participating parties has been about 6 percent because the lending (related) party has not looking to maximize the return. "A lot of times, at least one of the kids is already supporting the parents with some sort of monthly income," Smith said. "But none of these payments are documented or other siblings have no idea that one of their brothers or sisters is even helping the folks at all. Family Advantage documents all of these payments and creates a lien on the home that is repaid before other family members receive their interest in the home - which makes up a great deal of the average person's estate." The cost to set up the Family Advantage loan averages $2,499 (includes documentation, lien recording, ongoing service, upfront consultation and distribution of the repayment) plus $9 for each payment made, typically a monthly check to the folks. However, lump-sum payments can be substituted at any time, allowing the lender-child to earmark expected bonuses to the program or other funds that could be coming from stock sales, home sales or potential big-ticket windfalls. "We have one client who is a widow with no children," Smith said. "She owns her home and contacted an acquaintance - somebody who has significant assets. They are obviously unrelated but they worked out an arrangement where the acquaintance will slowly accumulate equity in the property by making monthly payments to the homeowner. They worked out an acceptable interest rate for both sides." The upside of the concept is that there is no age restriction, the property secured could be a principal residence, second home or investment property and the upfront closing costs are less than the standard reverse mortgage. In addition, borrower and lender are free to negotiate a reasonable interest rate yet one that clearly reflects a genuine business deal. The downside of the deal is that the homeowners have no immediate recourse if the payments cease. "We were simply looking for a way for people to annuitize their home and have the relinquished equity go to somebody they knew," Smith said. "We provide a professional, third party to oversee the deal. We've found it's simply a vehicle some families and friends can use." Tom Kelly's new book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International and Jeff Hornberger, the National Association of Realtors' international market development manager. Signed copies are available on www.crabmanpublishing.com.

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