Buying or refinancing parents home

[ares99]

My parents are in their early 70's and living off of social security which is not much. They lost their savings, etc, due to a bad decision coupled with the financial crash in 2007.  Their house was paid for at the time but to avoid bankruptcy my father took out a 15 year balloon note on the house. The note is due in July next year. They still owe 150k so it either needs to be refinanced or I need to buy the house from them unless there is a better option. The house is currently worth around 200k. 

I don’t like the idea of signing a 15 or 30 year note for their house but I think it’s the best route to take for a number of reasons: (1) They don’t want to leave their home, (2) Rent is expensive where we live and the monthly mortgage payment would be much less than monthly rent for an apartment, (3) I obviously love my parents but having them move in with me and my wife would probably be a bad idea, (4) I’ve been helping with their bills for a long time now anyway so at least this way I have the possibility of getting some if it back since I will be getting equity in the house. (Even if I just co-sign for a refinance instead of buying I will be added to the deed).

Any suggestions on the best way to go about this, pitfalls, or reasons why it’s a bad idea would be appreciated.

[ncornilsen]

You could buy it and set up a living trust... we did that to transfer a family farm to my Brother from my grandma, and it works well... but the property had 2 houses so it wasn't like my brother still had to rent a place.

[Catbert]

Are you the only child?  Things get more complicated with siblings.  You may perceive you're helping your parents to keep the home.  Sibling might see it as you "stealing" the house.

Do you have 150K available to pay off the balloon?  If so, pay it off and get your parents to sign a mortgage with you.  That would secure your investment when they die (especially if you have siblings).  The could pay you every month either amortized or interest only or you could look into loan forgiveness.  I'm not sure "loan forgiveness" is the right term.  Maybe called  "gift loan"?  What I mean is forgive a set amount each month/year staying under the yearly gift tax filing level.  Obviously talk to an attorney to ensure no unintended consequences.

I would avoid having my name on the property.  When they pass and you inherit that could impact your ability to get a full step up in basis when you inherit.

[BDJ_AG]

Do you foresee either of your parents using Medicaid services in the future for their care? If so there are some pretty strict rules around that and if they have made (or been given) too much money in the 5 year period before they need services they can deny your request. They will also claw back their money by putting a lien on property, etc. but there are certain ways around that and I would suggest having a discussion with an eldercare attorney.

With the above accounted for, I would personally refinance the home in lieu of dropping a lump sum $150k into it assuming you can get a decent interest rate on it.

[wenchsenior]

Do you foresee either of your parents using Medicaid services in the future for their care? If so there are some pretty strict rules around that and if they have made (or been given) too much money in the 5 year period before they need services they can deny your request. They will also claw back their money by putting a lien on property, etc. but there are certain ways around that and I would suggest having a discussion with an eldercare attorney.

With the above accounted for, I would personally refinance the home in lieu of dropping a lump sum $150k into it assuming you can get a decent interest rate on it.

This also applies if they give money away.  Basically, any big financial transactions within 5 years can potentially trigger denial of Medicaid.