A recent survey from realtor.com and census wide found that 78% of home shoppers planning on buying a house within the next year think that they’re going to be priced out of the market if home prices and interest rates continue to increase.

Here’s how you might be able to help your grandkids buy their first home without you pulling any money out of your retirement savings. Or getting that dreaded question of will you cosign for a mortgage. Neither of those options are a great way to help someone buy a house.

Because grandparents are awesome, they often do those things anyway. However, there is an alternative that doesn’t require gifting money from retirement savings of cosigning for a more.  The alternative is to gift funds for a down payment using a reverse mortgage to gift equity.

Let’s take a look at an example of what this might look like.

Here’s the scenario of Rick and Ginny and How They Helped Their Granddaughter Buy Her First Home

Lisa’s found her first cute little starter home for $380,000.

Lisa has been working hard, been frugal and saved money. She’s saved enough to put 5% down on the home she wants to buy.

She got a quote from her credit union for a 30-year fixed loan @ 7.17% APR (rates as of 7/27/2023)

The payment would be $2,443 a month. Even though she’s qualified for that payment. Lisa feels like she would be stretched really thin financially with that large of a monthly payment. She just feels like it’s just too much to handle. She does not want to put herself in that tough of a financial position to buy her first house.

Rick and Ginny are a little disappointed by that news. They want to help Lisa, but they don’t want to cosign for a mortgage, and they don’t feel comfortable pulling money from their retirement.  They gave me a call to take a look at getting a reverse mortgage as an option and gifting equity to Lisa to help here buy her first home.

The good news is that Rick and Ginny can help Lisa buy her first home because they own an $800,000 home free and clear. They were planning on leaving the home for Lisa anyway. So why not get the reverse mortgage and help her today.

Sure, they could have pulled money out of their retirement savings because it could put their retirement at risk. They love and Trust Lisa but they just do not feel comfortable co-signing.

The reverse mortgage would allow Rick and Ginny to access $316,000 of their home’s equity. They  would be able to access $176,000 of those funds the first year. They decided that they’re going to gift the entire $176,000 to Lisa.

Here is an example of gifting equity through a reverse mortgage and this is what their reverse mortgage is expected to look like over time so

Numbers in illustration based on interest rates of 7/27/2023. Initial APR of 8.08%. The loan has a variable rate which can change each month. The rate is tied to the 1 Year CMT with a margin of 2.75%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.56% plus .5%. Estimated closing costs of $26,991. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend.  Assumes no payment made. The content is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation

The blue represents the home value assuming a four percent appreciation rate,

The orange represents the loan balance and we can see this loan balance is increasing over time because we are assuming that Rick and Ginny are not going to make a monthly payment towards the reverse mortgage.  Because they’re not making a monthly mortgage  payment the interest and mortgage insurance gets added to the loan balance.  (They still have to pay their property taxes and their homeowners insurance)

The green represents the reverse mortgage line of credit.  The amount of funds available in the line of credit is $138,000,  This is what’s left over after drawing out the funds they are going to gift to Lisa and lumping the closing costs into the loan.  We can see this line of credit is growing over time as well and that’s because any funds available in this line of credit are growing at the current interest rate plus a half a percent.  Over time  there’s more and more funds for Rick and Jenny to draw from at some point in the future.

There are some additional scenarios and options of gifting through a reverse mortgage than we have covered so far.  Here are a couple more scenarios.

Numbers in illustration based on interest rates of 7/27/2023. Initial APR of 8.08%. The loan has a variable rate which can change each month. The rate is tied to the 1 Year CMT with a margin of 2.75%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.56% plus .5%. Estimated closing costs of $26,991. Home appreciation assumed at 4%. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend.  Assumes no payment made. The content within this video is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation

The image above is part of the amortization table that Rick and Ginny received.  I’ve highlighted years four and five.

Towards the end of year four,  Rick and Ginny could pull more money out of this line of credit and gift funds to Lisa so she could pay off her home.  How awesome would that be for Lisa? With no mortgage payment she could max out her 401K. She could put more money away for retirement savings. It just changes the whole dynamic of Lisa’s life.

Another scenario is let’s say Lisa got married during that five-year period.  Lisa and her husband had a child during that time. They need to upgrade out of the starter house into a bigger house with a bigger yard.

At that point Rick and Ginny could pull more funds out of the reverse mortgage line of credit in year 5. Gift those funds to Lisa and her husband for them to purchase a new house. Assuming that Lisa qualified and she wanted to do so, she could keep that starter house as a rental. What a great way for Rick and Ginny to create a lot of stability, and assets and wealth for Lisa, her husband and their new great grandchild.

There are a lot of different ways that the reverse mortgage can be used to help your grandchildren really get a solid start in life.

In this example, buy gifting funds to Lisa, Rick and Ginny are able to:

• Get Lisa’s mortgage payment down from $2450 mo. to just $1250 mo. Making the payment affordable for Lisa without her needing to stretch financially.
• Over a 15-year period her home is expected to appreciate from $380,000 to $684,000 assuming a four percent appreciation rate.
• During that 15 year period Lisa would have paid her loan balance down over fifty thousand dollars.
• Lisa is expected to have $546,000 in equity at the end of 15 years.
• Owning gives Lisa a lot of stability and security that renting does not offer.

By gifting with a warm hand, Rick and Ginny are able to have a huge impact on Lisa’s life immediately and over the rest of her life.

This last point is really critical. Assuming in 15 years, at the age of 90, Rick and Ginny have passed away. Just like they had planned,  they leave their house to Lisa. Lisa doesn’t want their house so she sells it. Based on the amortization tables, she is expected  to net over $800,000 when she sells the home.

What’s interesting is that’s pretty close to the same amount she would have received had Rick and Ginny passed away 15 years earlier. Based of the estimates and forecasts, Rick and Ginny are expected to leave Lisa a significant amount of equity.

Not only are Rick and Ginny expected to leave Lisa significant amount of money.  They helped her way earlier by helping her buy her first home and allowing her to build a significant amount of wealth. Rick and Ginny have had that massive impact on Lisa’s life through the use of a reverse mortgage.

Want to see how this would work for you and your grandchildren? Give me a call. I am  happy to put the numbers together for you,  do some forecasting,  answer any questions that you have about the reverse mortgage, and if getting a reverse mortgage would be a good way for you to gift early to your grandchildren.