No, they are not obligated. But it seems pretty counter-productive to borrow against your home, and then pay interest on the debt.

You only have access to a percentage of your homes value, and you lose even more through interest.

Alternatively, you could sell our home, downsize and have money left over to help support your life. And since the sale is free from capital gains its tax free.

Sell your home, and you enjoy 100% of the equity.

Or reverse mortgage 25% of the value and watch the “equity” in your home being sucked away by interest payments and enjoyed by a predatory lender.

Houses are not eggs, and sitting on them for longer than you should isn’t always the best choice.

If you cant afford your life given your current financial circumstances, how in the world can anyone suggest taking out debt to finance this unaffordable life is a good idea?

It’s not.

They’ll die eventually, and the house will be on the market. No one is obligated to move out of their home to make room for someone else.

What kind of society is this when millenials cant afford houses and live at home or are crammed into condos, while old people live in alone in huge houses incurring ridiculous debt.

There’s your supply and debt to income problems all rolled into one….

Just because someone is “dumb” doesn’t mean it is OK to take advantage of them. No doubt some predators will do just that.

Risk factors include:

Granny lives way longer than estimated.
Interest rates increase sharply, thus compounding faster than projected.
House market value declines, erasing remaining equity.
Estate getting tied up in court after Granny passes (very common), leading to several extra years of compounding and ultimately the amount owing surpasses the value of the home.

I would assume these reverse mortgages include a clause in the fine print allowing the lender to force a sale in the event where equity shrinks beyond a certain threshold. Man, how would you like to be the employee who has to enforce that agreement? “Sorry Gramps, but you lived too long, we’re forced to exercise the escape clause and sell the house out from under you before you end up owing us more than the house is worth.”

As a side note, my wife’s 80 year old uncle, who had owned (or should I say “owned”) the same home for over 40 years just had to sell it. He had been refinancing for years, and owed over $200K on a $350K house he purchased in the 1970s. He got to the point where his pension could no longer keep up with the payments. Whether he did a reverse mortgage or just regular HELOCs I do not know. From the way it was described to me (“refinancing” was the word used) it sounds like the latter. However, the example is instructive. If reverse mortgages become common, his predicament will also become common.

Can’t see anything going wrong in that scenario, but a lower priced home where someone takes out a lot more equity (think max id 55%) could get pretty ugly depending on interest rate terms, and whether or not the bank is able to call in a loan or demand that an owner post more collateral if the LTV drops below 55%

Please let me know if I am missing something here,

Thinking of a more extreme scenario.
– House prices crash by 30-40% over next 3 years
– Home worth 1 million today
– Borrower takes out the full 55% today at age 55 …. $550k
– 4-6% interest rates for life of loan
– Sells home in 20 years at age 75

3 years from now home is worth 600-700k
Not going to figure out the compound but 550 000 grows by 27,500 a year at 5%.
So in three years debt is worth at least 632,000 K
With 40% crash you are already under water.
With 30% crash your debt is now worth 90% of the value of your home.
Can the bank demand collateral or force you to sell? (Hopefully you still have a large chunk of that 550 000 in something liquid)

Also, even if the bank cant call in these loans. If a big crash happens and if the value of the debt gets close to the full value of the home, you are now in a situation where you need the asset to appreciate faster than the interest build up. Presumably after a big crash prices would rise faster than 4-6% a year. But if rates go up there is a very strong chance that you have 0 equity left by the time you sell.

Need to look into this as well.

I wonder what the interest rates will be compared to a normal mortgage or HELOC and how long you can lock in a rate. At 4-6% for example the value of the loan doubles in under 20 years. Do the banks have any ability at all to call in that loan and force you to sell?

From banks perspective I think it would also be pretty hard to fund a large quantity of these deals. If no repayments happen for 10-40 years how do the banks fund new deals? Will probably need to figure out a way to bundle them up and sell them off.

Depending on interest rates for these, if your are the heir to someone considering one of these and you have some equity or assets you can play with it might be in your best interest to take a HELOC out and just give that to your parents. At least keep the principal from growing year over year.

Equitable is also an alt-lender with vulnerabilities similar to Home Capital Group.

This “wealth” is imaginary to begin with. For some reason many people bought into the idea that wealth is something that allows to take upon more debt.