Author Topic: Elderly parent wants to get a reverse mortgage  (Read 6100 times)

freezerburn

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Elderly parent wants to get a reverse mortgage
« on: August 11, 2015, 08:47:30 PM »
I'm an only child of a single parent who is in her mid-seventies. My mother sold her house several years ago and got a chunk of money from the sale. The idea was that she would use her profit to buy a place in cash, and live on her social security income. I think she has between 140-150k from the sale, which has been sitting in a bank account.

After the sale she rented a house in a location several states away that she has come to dislike. She rented it never having been to the area before and not knowing anyone there. (fwiw I agree with her that it's not the right place for her, but I also thought it was a bad idea to move there sight unseen in the first place.) In the years since, she has changed her mind at least 9 times about where exactly she wants to move. She's also been looking at houses that are about 1.5-2x over budget, and large in terms of square footage and property size. For example, she will sometimes send me listings that are for 2500+ square-foot fixer-uppers on 10+ acres that are a not-insignificant drive from the nearest services, and they are listed at 200k or more. I just keep saying the same things in response: it's very nice but that looks like too much house for you, that's over your budget, that looks expensive to maintain, that looks like it's too isolated, etc. etc.

Here's my question:
She has now told me that she is considering a reverse mortgage to purchase and wants to talk to me about this after she gets details from a bank in a couple of days. I don't know what to think, but my instinct is that this is a very bad idea. What are the pitfalls? What's considered a high fee? Is this just a scam that will transfer all of her equity to a bank? If she wants to move or sell, will this make that impossible? What happens if she gets sick and needs to go into assisted living--will the bank just take the house? Are there any reliable sources online that talk about reverse mortgage pros and cons?

I feel weird putting this out on the interwebs because it's not about my money or choices, but I'm worried and not sure what to think or do and I feel helpless. It's difficult for me to separate my emotions from this --and from the money-related baggage in our relationship-- and make sure I give her advice that will be helpful and something she will actually take seriously...

As background: my mother has a history of living beyond her means and has no retirement savings that I'm aware of. She is also very stubborn and admits that she will not compromise on what she wants. She gets dissatisfied with places quickly and has moved every 1-5 years (often interstate) as long as I can remember. She is still in relatively good health but is starting to have some chronic problems that sometimes limit her willingness to leave the house, and I don't think she's planned for end-of-life care at all. She refuses to consider moving into a condo--she wants to get a house of her own, with enough space for her hobbies, and enough money left over to get furnishings she wants and buy a new car. (Although I think I did manage to dissuade her from getting a pool.) I live in an LCOL Midwest area where that scenario is possible on her budget but she will not consider moving near me since she wants to be on the East Coast. I may have to move in as soon as a year so admittedly I haven't tried to persuade her as hard as I could. She continues to lobby me to move near wherever she is, but my job doesn't allow for me to choose where I live--I work in a specialized field where vacancies are rare, and I have to go wherever the job is.

Anyhow, thanks for reading, and for any advice/wisdom/support you can share.

MDM

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Re: Elderly parent wants to get a reverse mortgage
« Reply #1 on: August 11, 2015, 08:54:08 PM »
I'm pretty sure she has to own a home before doing a reverse mortgage.  E.g., see http://www.consumer.ftc.gov/articles/0192-reverse-mortgages and https://en.wikipedia.org/wiki/Reverse_mortgage.

Maybe she saw an ad on TV about "extra money for seniors" via reverse mortgage and thought "sounds good!"...?

Another Reader

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Re: Elderly parent wants to get a reverse mortgage
« Reply #2 on: August 11, 2015, 09:05:17 PM »
The bank probably told her she could buy the house for cash and then take out a high-priced reverse mortgage to get some of her equity out.  Could be a lump sum or a monthly payment.  She probably likes the idea of owning the house and getting the money back.

If she has to go into assisted living or nursing care, this can get very complicated.  As soon as she is no longer in the property, the loan is due and payable.  She or you would have a very short window to sell the property before the lender takes it back.  Your concerns are justified and your mother may not completely understand what is being offered.

In your shoes, I would consider a visit to assess her physical and mental well-being, along with a trip to the lender to obtain a better understanding of the product.

okonumiyaki

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Re: Elderly parent wants to get a reverse mortgage
« Reply #3 on: August 11, 2015, 09:07:11 PM »
Yep, a reverse mortgage/ equity release means you own a house, and borrow on it, and roll up the interest to be repaid on sale of house.

As she doesn't own a house...  Maybe she is thinking of buying outright (in cash) then setting up a reverse mortgage?

They can be useful in certain circumstances (lots of equity in house, not willing/ able to downsize) but are pretty expensive.  They also normally have a debt/ equity limit (because it would be such bad publicity for the lender to repossess, so they will try and never lend to a level where that might happen).

She's probably better off buying an annuity and renting. 

MoonShadow

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Re: Elderly parent wants to get a reverse mortgage
« Reply #4 on: August 11, 2015, 09:10:44 PM »
A reverse mortgage is a notoriously bad idea. 

Zamboni

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Re: Elderly parent wants to get a reverse mortgage
« Reply #5 on: August 11, 2015, 09:16:24 PM »
From everything I've read about reverse mortgages, she will just lose substantial money on it. They are often viewed as a vehicle of last resort for seniors; people who have lived in the same house for decades and refuse to move but who need the money to eat. It's just too bad that they get charismatic actors on TV to make those convincing advertisements!

If she likes living in a house, why not find a nice house to rent and preserve that nest egg? Putting it all into an illiquid asset like a house, and then needing the bank to leak some of the money back to buy groceries at this point is just a bad idea.

MoonShadow

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Re: Elderly parent wants to get a reverse mortgage
« Reply #6 on: August 11, 2015, 09:18:55 PM »
Putting it all into an illiquid asset like a house, and then needing the bank to leak some of the money back to buy groceries at this point is just a bad idea.

Exactly.  At this point, if a steady income stream is the goal, even an immediate annuity would be a better idea than buying a house for cash and then getting a reverse mortgage.

GizmoTX

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Re: Elderly parent wants to get a reverse mortgage
« Reply #7 on: August 11, 2015, 09:24:04 PM »
A reverse mortgage is a notoriously bad idea.
+1

yyc-phil

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Re: Elderly parent wants to get a reverse mortgage
« Reply #8 on: August 11, 2015, 09:32:41 PM »
I will echo everyone else here. A reverse mortgage is a bad idea and something to keep as the very last resort after all options are exhausted. This being said, in the end your mother is an adult who can make her own decisions so at this point, if I were you I would make sure your mother has the right information so she fully understand the pros and cons and the possible consequences of her decision.

freezerburn

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Re: Elderly parent wants to get a reverse mortgage
« Reply #9 on: August 12, 2015, 09:02:14 AM »
Thank you all for your responses. I expect to find out more about what exactly she's considering soon and will try to get a fuller picture of her finances then too so I can figure out what her options are. Over the past few years she alternately asks for my help and then refuses to listen.

To me it sounds like what she means is some form of (regular?) mortgage that will allow her to buy more house than she can afford in cash, and thus enable her to live beyond her means. It was the "Reverse mortgage for purchase" phrasing she used to describe it that set off an alarm bell for me.

Her goal isn't to use that nest egg for an income stream--she wants to spend it on a house that she can fix up how she wants (new kitchen, etc) and then rely on social security for her income. I agree with the posters who say it's not a good idea to put that nest egg into an illiquid asset. She isn't happy living in a rental and I don't know that she'll budge from wanting to buy a place. For renting her current place sight unseen, she lucked out with a nice and responsive landlord. Yet she can't seem to resist making small "improvements" to the place without asking first however, and she spends a lot of time watching HGTV. Home improvement is kind of a fixation for her. She has renovated two large beautiful victorian houses in the past, and isn't really taking on board the idea that she needs to downsize now.

MrsPete

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Re: Elderly parent wants to get a reverse mortgage
« Reply #10 on: August 12, 2015, 03:56:05 PM »
You say she has a history of becoming dissatisfied with her housing /moving frequently ... what happens if you take out a reverse mortgage and then want to move?  I assume you can't do it.  This makes no sense for her.

I suggest she buy /rent a small condo near the services she needs. 

GizmoTX

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Re: Elderly parent wants to get a reverse mortgage
« Reply #11 on: August 12, 2015, 08:27:28 PM »
My brother's MIL had a reverse mortgage on her condo, courtesy of her son's bad advice. A year ago she had developed full blown dementia & was no longer capable of living on her own. The fine print of the reverse mortgage said that the full amount of the "mortgage" became due whenever she no longer lived in the property for any reason & renting it out was forbidden. They had to sell the place & pay off the mortgage before she could move into a nursing home. Fortunately the place had appreciated but that's not always the case, especially for a condo. The upfront fees for a reverse mortgage are horrendously expensive.

I'm a red panda

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Re: Elderly parent wants to get a reverse mortgage
« Reply #12 on: August 13, 2015, 06:56:54 AM »
The bank probably told her she could buy the house for cash and then take out a high-priced reverse mortgage to get some of her equity out.  Could be a lump sum or a monthly payment.  She probably likes the idea of owning the house and getting the money back.


If she has cash to buy the house- why does she need a lump sum payment from the bank?

A reverse mortgage sounds like a bad idea; buying a house you don't already have equity in to get one seems illogical.

MrsPete

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Re: Elderly parent wants to get a reverse mortgage
« Reply #13 on: August 13, 2015, 07:08:33 AM »
My brother's MIL had a reverse mortgage on her condo, courtesy of her son's bad advice. A year ago she had developed full blown dementia & was no longer capable of living on her own. The fine print of the reverse mortgage said that the full amount of the "mortgage" became due whenever she no longer lived in the property for any reason & renting it out was forbidden. They had to sell the place & pay off the mortgage before she could move into a nursing home. Fortunately the place had appreciated but that's not always the case, especially for a condo. The upfront fees for a reverse mortgage are horrendously expensive.
Yes, you don't have to search far for cautionary tales about this foolish choice.  I can add one:  An old neighbor of ours (literally old, he was probably 70 when we met him, and we knew him for 20 years) took out a reverse mortgage because his house was falling into bad repair and he didn't have the money for the renovations.  He lived only two months after signing the paperwork. 

I agree with the above poster who says these are loans for people who have lived in their house forever, want to stay in their house, but also need money to go out to eat. 

2Cent

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Re: Elderly parent wants to get a reverse mortgage
« Reply #14 on: August 13, 2015, 08:34:54 AM »
Maybe you could arrange something with the bank that she gets a reverse mortgage on better terms. From what I hear it's more about small print that about the actual concept. The only thing that sucks for you is that she is basically planning to free up all her money for spending and not leave it as an inheritance.

I'm a red panda

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Re: Elderly parent wants to get a reverse mortgage
« Reply #15 on: August 13, 2015, 09:03:44 AM »
The only thing that sucks for you is that she is basically planning to free up all her money for spending and not leave it as an inheritance.

She could decide to give it all to the "save the sea slugs" fund. No one is entitled to an inheritance.

Axecleaver

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Re: Elderly parent wants to get a reverse mortgage
« Reply #16 on: August 13, 2015, 09:33:24 AM »
This makes no sense at all in her situation. If she wants to turn her money into regular payments, she could buy an annuity (make sure to get a "period certain" at her age) and on much better terms. Maintaining a home can be very challenging for young, healthy folks - can't imagine getting into that at age 70, sounds like a recipe for a money pit. If she really wants to buy and renovate a property, maybe you can talk to her about setting a more reasonable budget for buying and fixing a place up. Try to target 50% of the pool for the property, 10-20% for the initial renovation, and 30-40% to cover emergencies over the next two years.

My mother got the hard "reverse mortgage" sales pitch from her bank a few times. I have to explain that this is a bad idea about once every 12-18 months.

Davids

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Re: Elderly parent wants to get a reverse mortgage
« Reply #17 on: August 13, 2015, 05:19:36 PM »
My rule of thumb is if the Fonz is selling, I ain't buying.

Another Reader

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Re: Elderly parent wants to get a reverse mortgage
« Reply #18 on: August 13, 2015, 07:00:27 PM »
What mom wants is the house AND the annuity, which is exactly why the bank is pitching this to her.  Look, you can have your cake and eat it too!

I don't know how effective the argument would be, but you might explain that if she needs care, she will have to go into a nursing home on Medicaid, as the bank will take the house to pay the loan.  It would be a much better situation for her to go into a nice assisted living place first with her money rather than have to go into a nursing home that accepts Medicaid.

2Cent

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Re: Elderly parent wants to get a reverse mortgage
« Reply #19 on: August 14, 2015, 12:49:19 AM »
The only thing that sucks for you is that she is basically planning to free up all her money for spending and not leave it as an inheritance.

She could decide to give it all to the "save the sea slugs" fund. No one is entitled to an inheritance.
If she worked hard for it, I would say that's true. If she herself received a large inheritance or the father was the one who brought all the money to the family, I would say it is not ethical to spend it all and leave some for the next generation.