Reverse mortgage?

[drobots]

Hello mustachians - I'm in the process of helping my mom retire. She's 65, was asked to retire next year, her house is worth $550k, but she has a $360k mortgage with 26 years left on it! She rents out one of the bedrooms, but it's still an enormous expense. She asked me to check into reverse mortages, and from what I can tell, it would reduce her monthly payments at the expense of basically losing the house to the bank or having one of her heirs (me) have to deal with her mortgage when she passes away, including all the accumulated interest.

Do any of my fellow mustachians have experience with this? I'd like to show her that it's a bad idea, they try to help her sell the house and use the ~$200k difference to buy a 2 BR condo (or get pretty close).

[boarder42]

Reverse mortgages are bad. Why can't she just rent an apt ? Why does she need 2 bedrooms. Lots of questions here

[Catbert]

Reverse mortgages are not the anti-Christ although they can be a lousy deal for some (many?) people. 

The interest rates and up front fees are higher than a normal mortgage. (After all they may have to wait 30+ years before they get paid a dime.)   If the owner is going to leave the house in a few years (maybe 10, not sure what a good rule of thumb is) then the high fees make it a bad deal.   As I understand it you need significant equity for it to make sense - or even qualify.  Does your mother have that?

You don't necessarily "lose" the house when the owner dies.  It's a mortgage and its all due and payable when the owner dies or leaves the house.  If inheritor wants to keep the house then they can re-finance to pay off your mom's reverse mortgage.  No different than a regular mortgage except that if your mom moves out of the house she can't rent it - once she leaves the reverse mortgage is all due and payable.

As I understand it there a many ways to take the reverse mortgage depending on needs and equity.  It can be used just to wipe out an existing mortgage but with no cash in pocket.  Or a line of credit that can be drawn on as needed.  Or a steady monthly payment.

[Davids]

In my opinion the only reason a reverse mortgage would ever make sense is basically if you have no heirs and you know you are living at your house for the rest of your life then might as well take it.

[marty998]

She would need much more equity than what she currently has.

Reverse Mortgages make a lot of sense for high value properties.

Say you own a property worth $1 million. You can take out a reverse mortgage for $200,000 @ 6% interest.

At the end of the first year, the interest is capitalised so your debt becomes $212,000 (ok, slightly more because of compounding effect). But if your property increase in value at a long term average rate of say 4.5%, it has gone up in value by $45,000 in that first year.

Thus your net equity has and will still grow....

[Cassie]

For many of them if she were to go into a facility for longer then 3 months then they can force the sale of the home to get their $ and she would get the balance. Even if she planned to come home say after having some physical rehab for an injury they could still do this.  I actually researched them in case we want to do this when really old.  I would down size in her situation.

[drobots]

She only needs 1 bedroom (a studio really) because it's just her, but I'm just assuming few condos in her area would have 1 BR. Also, renting until she dies is probably not the best financial situation for anyone. She's 65 so 20+ years to go and I'm trying to reduce her monthly payments so it would be reasonable for her to live off her projected SS + 401k withdrawal throughout that time.

[Jack]

She only needs 1 bedroom (a studio really) because it's just her, but I'm just assuming few condos in her area would have 1 BR. Also, renting until she dies is probably not the best financial situation for anyone. She's 65 so 20+ years to go and I'm trying to reduce her monthly payments so it would be reasonable for her to live off her projected SS + 401k withdrawal throughout that time.

That's a lot of assumptions to make without actually checking around (for one bedroom condos) and doing the math (for buying vs. renting). Besides, who says she has to stay in the same area?

[rothnroll]

She only needs 1 bedroom (a studio really) because it's just her, but I'm just assuming few condos in her area would have 1 BR. Also, renting until she dies is probably not the best financial situation for anyone. She's 65 so 20+ years to go and I'm trying to reduce her monthly payments so it would be reasonable for her to live off her projected SS + 401k withdrawal throughout that time.

Renting usually makes better financial sense than buying, especially for an older woman who more than likely doesn't want the upkeep of a house.

[Cassie]

When I was single in my 40's I bought a small 2 bd condo. I l had a mortgage that was cheaper then rent and I liked a 2nd bd for guests and to store stuff.  YOur Mom needs to look at what she wants and then the prices. I would not ever want to be in a studio or 1 bd unless that was all I could afford and I am around your Mom's age.

[frugaliknowit]

The best candidates for a reverse mortgage are equity rich/cash poor.  Your mother is NOT equity rich.  She's not a good candidate for a reverse mortgage.

[drobots]

Thanks all. Given the state of things, renting might not be such a bad idea. She also needs to stay in the area because she'll still be at least part time at her job for a couple years.