Reverse mortgage or sell stocks

[leighb]

I'm being asked to research if a reverse mortgage makes sense for my in-laws. In their specific situation they have around the clock in-home care. They will not be leaving for assisted living. This level of care is expensive. I think they're spending like 300,000 a year. The house is worth let's say 1 million. So given the need for large amounts of money to be withdrawn regularly, should it continue to come from stocks or from the equity in the house? Their finances are good, they're lucky to be in a situation where they can afford this. Once the reverse mortgage comes due, I assume one of the heirs would decide if they wanted to pay what's due and keep the house, or not.

In the "reverse mortgages are bad" argument we have:

• high setup fees
• onerous rules

In the "reverse mortgages aren't so bad" arena we have:

• not taxed
• money's left in the more liquid stock account to grow

Thoughts?

[Sibley]

How long are they expected to live? If the money will last for a year, but they're expected to live for 5, that matters.

[leighb]

I would expect MIL to live a few more months to a year. At that point the amount of care could really diminish. FIL should live a few years longer. 

[Louisville]

Sell the house and rent?

[leighb]

Sell the house and rent?

Thanks, but not an option.

I'm really only asking about option A: Reverse mortgage or option B: Continue to sell stocks. I get that theoretically there's more paths possible but not in this case.

[Dicey]

Why have money invested if not for this very purpose? Reverse mortgages are a last resort, IMO.

[Fishindude]

Why have money invested if not for this very purpose? Reverse mortgages are a last resort, IMO.

I agree with this idea.
Sell the investments.

[leighb]

Why have money invested if not for this very purpose? Reverse mortgages are a last resort, IMO.

Why is it a last resort?

It seems like pulling the money out tax free would be a good thing to factor in. Taxes on 300K is meaningful.

[Dicey]

Why have money invested if not for this very purpose? Reverse mortgages are a last resort, IMO.

Why is it a last resort?

It seems like pulling the money out tax free would be a good thing to factor in. Taxes on 300K is meaningful.

Because reverse mortgages aren't "free". They charge interest on the money you receive, plus loads of fees. Did I mention fees? Plus, you still have to pay taxes, insurance and upkeep.

Here's a random-ish Google link:

https://www.investopedia.com/mortgage/reverse-mortgage/

Scroll down to "Fees" and  "Interest Rates".

[405programmer]

I am 0% qualified to weigh in but I personally feel the comparative values of the accounts matters. This is only because I would not want to completely exhaust all stock as it could be needed later but wouldn't want to start the hassle / paperwork of a reverse mortgage if the stock value was still high enough to provide several years cushion. Something like:

(Stock >= 1 Million) -> Continue to sell stock for expenses
(1 Million > Stock >= 600K ) -> I would strongly consider starting a reverse mortgage to minimize but not necessarily eliminate the need to sell stock
(600K > Stock) -> I would immediately begin finding specific reverse mortgages because you have less than 2 years of expense remaining but a house worth a big chunk.


That said, I feel like the expenses of a reverse mortgage are usually not worth it unless a large majority of the wealth needed to fund your lifestyle is trapped in home equity and you're not in a position to move. If it's not the majority and is just a portion of the total wealth, I would not consider a reverse mortgage.

[leighb]

For the record I'm averse to the reverse mortgage. But since I was asked to weigh in, I decided I needed to know why I feel this way.

I found a good tool to help me think about this https://www.mortgagecalculator.org/calcs/reverse-mortgage.php

Let's compare 300K taken out in home equity which is not taxed to 300K taken out of stocks which will be taxed.

RM Costs: 2% to setup ($6000), 1.5% in insurance ($4,500), and 4% interest rate (~$12,000).  So, that's $22,500 in year one. Then after 5 years, the balance on that RM would be about $370K.

Cost of selling 300K in stocks: Federal and state tax implication are about $56,000 initially. Plus, they will not get any stock growth. After 5 years, that 300K (assuming 6%) would have grown to about 400K.

What am I missing? If I'm not missing anything, then I shouldn't be judging RM the way I do. It appears like it's a solid tax strategy.

[Catbert]

I think 405 is right, this depends in part of the value of the stock funds.  If there's 2 million in stock and MIL will likely only live a year FIL won't need a RM for his needs.  But if there's only 600K in stock starting finding one. 

[Dicey]

For the record I'm averse to the reverse mortgage. But since I was asked to weigh in, I decided I needed to know why I feel this way.

I found a good tool to help me think about this https://www.mortgagecalculator.org/calcs/reverse-mortgage.php

Let's compare 300K taken out in home equity which is not taxed to 300K taken out of stocks which will be taxed.

RM Costs: 2% to setup ($6000), 1.5% in insurance ($4,500), and 4% interest rate (~$12,000).  So, that's $22,500 in year one. Then after 5 years, the balance on that RM would be about $370K.

Cost of selling 300K in stocks: Federal and state tax implication are about $56,000 initially. Plus, they will not get any stock growth. After 5 years, that 300K (assuming 6%) would have grown to about 400K.

What am I missing? If I'm not missing anything, then I shouldn't be judging RM the way I do. It appears like it's a solid tax strategy.

Hmmm, there is also a monthly fee and the interest rate typically isn't fixed. Also, you still need to pay the property taxes and upkeep, so that has to be included in their spending.

I knew someone who was making a killing selling reverse mortgages. I seem to recall that people would borrow up to the limit, and spend the money. Then the limit would be increased, so the owners would take out a new loan, triggering all the fees over again. That was a decade ago, so things may have changed...

I would also look into fees any that might be charged at the end of the loan. Kind of like the "gotchas" when you turn in a leased vehicle.

It seems your decision could go either way. Perhaps now is a good time to consult a tax or estate planning professional.