Reverse Mortgages

[Alternatepriorities]

I've always just written off reverse mortgages as another financial product designed to separate people from their wealth. Recently an older friend asked me about it so I did a little reading and at first glance they seem not necessarily any worse/better than a regular mortgage but designed to solve a different problem. I still feel a bit skeptical but I don't want my prejudice to write off something that might help her.

Short version of the story: She's from HI, but has lived a modest middle class life in the midwest for most of her adulthood. She's a healthy senior citizen now, almost retired, and just inherited her parents home back in HI. The house has substantial equity but also needs major work. She'd like to live out her days there but you can't trade a Midwestern house for one in HI without spending some money and she doesn't want to spend years working to pay off the HI house and renovations. Does it make sense to do a reverse mortgage to pay off the existing mortgage and renovations and then enjoy her retirement in HI?

[reeshau]

I think you need to spell out some factors to sort out what now looks like a jumble.  From what you say here, I would say:  why doesn't she sell the Midwest house and use that money for renovations?  Seems like a simple first step.

To sort it out:

Friend's age?
She has to be 62 to qualify for Federal backing of it

Mortgage and value of HI house?

Mortgage and value of Midwest house?

Renovations needed?

Retirement funding without reverse mortgage? (At least, is she covered with other wealth, even if ahe moves to HI?  Or will she need to live off of some of this too?)

The younger she is, the less loan-to-value she will be able to get.

The Wall Street Journal just did a article on reverse mortgages, including recent legal changes.

[Alternatepriorities]

Rough Estimates:

Friend's age?
65

Mortgage and value of HI house?
400k and 1,200k

Mortgage and value of Midwest house?
She said she had 50K of equity in the house.

Renovations needed?
Extensive. I don't know the details but it sounds like her parents did very little to maintain the property. The value/equity is primarily in the location.

Retirement funding without reverse mortgage? (At least, is she covered with other wealth, even if ahe moves to HI?  Or will she need to live off of some of this too?)
She can cover her retirement needs in the midwest fine including her current mortgage. I don't think she plans to pay any expenses out of the reverse mortgage.

The younger she is, the less loan-to-value she will be able to get.

The Wall Street Journal just did a article on reverse mortgages, including recent legal changes.

If it were me, I'd just sell the house in the expensive location and buy something in a cheaper part of HI. One daughter I spoke with is of the same opinion. So, when the mother passes I expect the next generation will sell the property and cash out what is left of the equity. 

[yachi]

Well "substantial equity" is very relative.  It could look like a substantial sum of money if she sells the house and continues living in the Midwest, but it may look like very little when you expect it to cover large upfront repairs and interest on those repairs for 20 years.  I think most (all?) reverse mortgages require the house be your main residence.
Have you run any calculators to see if there's enough equity to cover what she wants to repair?  Is she also looking at trying to get monthly money out of the reverse mortgage?  That's the more typical scenario I've seen, but in those cases it's limited to elderly people who've run out of other assets to fund their needs.

[reeshau]

If it were me, I'd just sell the house in the expensive location and buy something in a cheaper part of HI. One daughter I spoke with is of the same opinion. So, when the mother passes I expect the next generation will sell the property and cash out what is left of the equity.

This sounds smart.  Is she resisting this idea?  Not only does it solve the money issue, but she can get a place better matched to her needs as she ages, and the maintenance she is prepared to do.  (Maybe a condo?)

[Alternatepriorities]

If it were me, I'd just sell the house in the expensive location and buy something in a cheaper part of HI. One daughter I spoke with is of the same opinion. So, when the mother passes I expect the next generation will sell the property and cash out what is left of the equity.

This sounds smart.  Is she resisting this idea?  Not only does it solve the money issue, but she can get a place better matched to her needs as she ages, and the maintenance she is prepared to do.  (Maybe a condo?)

She wants to live in the home she grew up in again. I'll have to talk with her more about the why next time I get a chance. She's close friends with DW's family and just heard I know something about finance. I'm down visiting them, so the question just kind of came up a couple days ago. The ligature she has is obviously trying to sell the idea to people, but it did make me realized reverse mortgages don't work quite the way I thought they did.

[frugal_c]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

[iris lily]

My single friend, age 72, took out a reverse mortgage in her 3,000 sq ft house in a harsh winter climate with acreage because she couldnt afford it otherwise. This,  after pulling equity out of her other houses for decades and spending it.

Last week I learned she’s pulling equity out of this current house with a reverse mortgage.

I have to admit I don’t really understand how it works but whatever..

Her plan is that she will “die in that house.” Maybe she will maybe she wont, but she’s not being practical about the limitation of being old and poor in a too-big property.

[iris lily]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Does it really Cover elevated end of life costs? How does the person in the house get any money in the end? I didn’t  think that’s how it worked but again I am very fuzzy about it.

My friend who has it in the house she can’t really afford has NEVER considered the cost of the money she has to be a problem. She would brag about getting something “on sale at 10% off” but then put it on a revolving charge account that wasn’t paid off for years. So, I am not surprised that these mortgages cost a lot.

[geekette]

I’ve been looking into this for my mom. NY Times article (may be paywalled).  They seem to now work more as a line of credit, and can be used to buffer sequence of return risks. Still seems expensive, though.

Dr Wade Pfau wrote a book “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement”. Unfortunately, my library doesn’t have it. $10 on kindle.

[reeshau]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

This is just how I think about them.  The only caution with this, though, is that if such an illness or condition manifests, the person may not be lucid enough to execute a reverse mortgage.  So a power of attorney with a trusted person is important to execute your wishes.

[Catbert]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Doesn't work for nursing home costs since once the home is no longer your primary residence it's supposed to be sold.  If both members of the couple are on the house and the reverse mortgage it would work on the first to go into a nursing home if the second partner remains in the house. 

[yachi]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Doesn't work for nursing home costs since once the home is no longer your primary residence it's supposed to be sold.  If both members of the couple are on the house and the reverse mortgage it would work on the first to go into a nursing home if the second partner remains in the house.

What Catbert is referencing, is the asset spend down required for Medicaid to start paying nursing home expenses.  Nursing home care it so expensive, and medicare covers so little, that most people who end up requiring nursing home care in the US need to qualify for Medicaid at some point.  One of the points made here is that the monthly payment from a reverse mortgage would put you over the asset requirement for Medicaid.  If the house is sold, it seems the reverse mortgage is paid off and the payments stop.  So if the reverse mortgage payments aren't enough to cover the nursing home, and you're out of other assets, you'll need to sell the house to qualify for Medicaid.

But I think it's an even worse idea for the healthy spouse to get a reverse mortgage to pay for the sick spouse's nursing home stay:
1) I doubt the reverse mortgage's payments are enough to cover a nursing home stay
2) The healthy spouse is allowed to keep the house (no matter its value) along with some income, while the nursing-home spouse qualifies for Medicaid.

Instead I favor accessing the equity in your house sometime in your 70's when you can use it to enhance your life, or make sure you can pay your property taxes, insurance and other expenses.  I'm thinking here of my neighbor who mowed is own yard, lived with an old truck, heat his house with wood, and didn't seem to go many places.  He could have lived better with a reverse mortgage, but he didn't (I think).  In the end, his estate ended up with the same amount of home equity as if he would have funds from a reverse mortgage, as he ended up in a nursing home and his kids helped sell his house with all the proceeds paid to the nursing home in order to qualify for Medicaid. 

** I should add here, that I've only ever thought about reverse mortgages that are the "Tenure Reverse Mortgage Payment" type.  These make payments over the borrowers' life, like an annuity.  There are other payment options, many of them quite scary: https://www.investopedia.com/mortgage/reverse-mortgage/how-avoid-outliving-your-reverse-mortgage/

[Catbert]

Yachi - You were crediting me with a much more sophisticated comment than what I intended lol.  I just meant that a reverse mortgage is due and payable whenever the borrower no longer lives in the house.  No longer living there could be due to death or moving into a nursing home.

[Villanelle]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Doesn't work for nursing home costs since once the home is no longer your primary residence it's supposed to be sold.  If both members of the couple are on the house and the reverse mortgage it would work on the first to go into a nursing home if the second partner remains in the house.

What Catbert is referencing, is the asset spend down required for Medicaid to start paying nursing home expenses.  Nursing home care it so expensive, and medicare covers so little, that most people who end up requiring nursing home care in the US need to qualify for Medicaid at some point.  One of the points made here is that the monthly payment from a reverse mortgage would put you over the asset requirement for Medicaid.  If the house is sold, it seems the reverse mortgage is paid off and the payments stop.  So if the reverse mortgage payments aren't enough to cover the nursing home, and you're out of other assets, you'll need to sell the house to qualify for Medicaid.

But I think it's an even worse idea for the healthy spouse to get a reverse mortgage to pay for the sick spouse's nursing home stay:
1) I doubt the reverse mortgage's payments are enough to cover a nursing home stay
2) The healthy spouse is allowed to keep the house (no matter its value) along with some income, while the nursing-home spouse qualifies for Medicaid.

Instead I favor accessing the equity in your house sometime in your 70's when you can use it to enhance your life, or make sure you can pay your property taxes, insurance and other expenses.  I'm thinking here of my neighbor who mowed is own yard, lived with an old truck, heat his house with wood, and didn't seem to go many places.  He could have lived better with a reverse mortgage, but he didn't (I think).  In the end, his estate ended up with the same amount of home equity as if he would have funds from a reverse mortgage, as he ended up in a nursing home and his kids helped sell his house with all the proceeds paid to the nursing home in order to qualify for Medicaid. 

** I should add here, that I've only ever thought about reverse mortgages that are the "Tenure Reverse Mortgage Payment" type.  These make payments over the borrowers' life, like an annuity.  There are other payment options, many of them quite scary: https://www.investopedia.com/mortgage/reverse-mortgage/how-avoid-outliving-your-reverse-mortgage/

Thanks for this. I didn't realize there were other types.  MIL recently got a reverse mortgage and I thought it was an awful idea at the time.  Now I wonder if it was even more awful than I thought.  She is in her 70s but generally quite healthy.  She is married, but only for a few years and as far as we know they have totally separate finances and the house was hers before the relationship so we think it is only in her name. 

The house is way bigger than 2 people need and I think they (especially the husband) would be much happier in a single-story home.  But due to the reverse mortgage, I don't know that she will ever be able to sell and have enough equity even to downsize.  Sure, she can stay there forever, but when stairs become a big problem and the only full baths are upstairs, what then?  If she'd had sold and downsized and taken a chunk of equity to live on, she would have been so much better off.  I don't know how she thought the reverse mortgage was the best idea.

[iris lily]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Doesn't work for nursing home costs since once the home is no longer your primary residence it's supposed to be sold.  If both members of the couple are on the house and the reverse mortgage it would work on the first to go into a nursing home if the second partner remains in the house.

What Catbert is referencing, is the asset spend down required for Medicaid to start paying nursing home expenses.  Nursing home care it so expensive, and medicare covers so little, that most people who end up requiring nursing home care in the US need to qualify for Medicaid at some point.  One of the points made here is that the monthly payment from a reverse mortgage would put you over the asset requirement for Medicaid.  If the house is sold, it seems the reverse mortgage is paid off and the payments stop.  So if the reverse mortgage payments aren't enough to cover the nursing home, and you're out of other assets, you'll need to sell the house to qualify for Medicaid.

But I think it's an even worse idea for the healthy spouse to get a reverse mortgage to pay for the sick spouse's nursing home stay:
1) I doubt the reverse mortgage's payments are enough to cover a nursing home stay
2) The healthy spouse is allowed to keep the house (no matter its value) along with some income, while the nursing-home spouse qualifies for Medicaid.

Instead I favor accessing the equity in your house sometime in your 70's when you can use it to enhance your life, or make sure you can pay your property taxes, insurance and other expenses.  I'm thinking here of my neighbor who mowed is own yard, lived with an old truck, heat his house with wood, and didn't seem to go many places.  He could have lived better with a reverse mortgage, but he didn't (I think).  In the end, his estate ended up with the same amount of home equity as if he would have funds from a reverse mortgage, as he ended up in a nursing home and his kids helped sell his house with all the proceeds paid to the nursing home in order to qualify for Medicaid. 

** I should add here, that I've only ever thought about reverse mortgages that are the "Tenure Reverse Mortgage Payment" type.  These make payments over the borrowers' life, like an annuity.  There are other payment options, many of them quite scary: https://www.investopedia.com/mortgage/reverse-mortgage/how-avoid-outliving-your-reverse-mortgage/

Thanks for this. I didn't realize there were other types.  MIL recently got a reverse mortgage and I thought it was an awful idea at the time.  Now I wonder if it was even more awful than I thought.  She is in her 70s but generally quite healthy.  She is married, but only for a few years and as far as we know they have totally separate finances and the house was hers before the relationship so we think it is only in her name. 

The house is way bigger than 2 people need and I think they (especially the husband) would be much happier in a single-story home.  But due to the reverse mortgage, I don't know that she will ever be able to sell and have enough equity even to downsize.  Sure, she can stay there forever, but when stairs become a big problem and the only full baths are upstairs, what then?  If she'd had sold and downsized and taken a chunk of equity to live on, she would have been so much better off.  I don't know how she thought the reverse mortgage was the best idea.

Don’t  reverse mortgages pretty much cover little old seniors who want to live beyond their means?

That is how I’ve come to view them in recent years as I see more people take on reverse morgages. Yes it is uncharitable of me.

[geekette]

Don’t  reverse mortgages pretty much cover little old seniors who want to live beyond their means?

That is how I’ve come to view them in recent years as I see more people take on reverse morgages. Yes it is uncharitable of me.

Yeah, quite uncharitable.  It's very helpful for the house rich/cash poor.  It allowed my aunt live in her rapidly appreciating house for several years until her partner died this spring.  She subsequently sold and moved to a continuing care place just a few months ago (with a tidy amount to pay her way).

[Cassie]

You have to be able to keep the home in decent shape and make needed repairs as well as paying the taxes.  Otherwise the reverse mortgage company can foreclose. They are loaded with fees and generally a last resort for people.

[Alternatepriorities]

Thanks for the feedback everyone. Things got a little crazy for the last couple of days, but hopefully I'll have another chance to talk with her before heading home.

[sonofsven]

I think of reverse mortgage more as a final safety.  Something to cover elevated end of life expenses.  A nursing home for instance.  At that point, it doesn't matter quite as much if you wipe out equity and frankly at that point most people aren't alive long enough for the interest to gobble up their equity value.

I don't think it's smart to do that now.  I know the rules are that she can't be forced out of the house but over the next 20 years it seems possible she could end up with next to no equity.

You would really need to get more specifics to figure out the answer.

Doesn't work for nursing home costs since once the home is no longer your primary residence it's supposed to be sold.  If both members of the couple are on the house and the reverse mortgage it would work on the first to go into a nursing home if the second partner remains in the house.

What Catbert is referencing, is the asset spend down required for Medicaid to start paying nursing home expenses.  Nursing home care it so expensive, and medicare covers so little, that most people who end up requiring nursing home care in the US need to qualify for Medicaid at some point.  One of the points made here is that the monthly payment from a reverse mortgage would put you over the asset requirement for Medicaid.  If the house is sold, it seems the reverse mortgage is paid off and the payments stop.  So if the reverse mortgage payments aren't enough to cover the nursing home, and you're out of other assets, you'll need to sell the house to qualify for Medicaid.

But I think it's an even worse idea for the healthy spouse to get a reverse mortgage to pay for the sick spouse's nursing home stay:
1) I doubt the reverse mortgage's payments are enough to cover a nursing home stay
2) The healthy spouse is allowed to keep the house (no matter its value) along with some income, while the nursing-home spouse qualifies for Medicaid.

Instead I favor accessing the equity in your house sometime in your 70's when you can use it to enhance your life, or make sure you can pay your property taxes, insurance and other expenses.  I'm thinking here of my neighbor who mowed is own yard, lived with an old truck, heat his house with wood, and didn't seem to go many places.  He could have lived better with a reverse mortgage, but he didn't (I think).  In the end, his estate ended up with the same amount of home equity as if he would have funds from a reverse mortgage, as he ended up in a nursing home and his kids helped sell his house with all the proceeds paid to the nursing home in order to qualify for Medicaid. 

** I should add here, that I've only ever thought about reverse mortgages that are the "Tenure Reverse Mortgage Payment" type.  These make payments over the borrowers' life, like an annuity.  There are other payment options, many of them quite scary: https://www.investopedia.com/mortgage/reverse-mortgage/how-avoid-outliving-your-reverse-mortgage/

Thanks for this. I didn't realize there were other types.  MIL recently got a reverse mortgage and I thought it was an awful idea at the time.  Now I wonder if it was even more awful than I thought.  She is in her 70s but generally quite healthy.  She is married, but only for a few years and as far as we know they have totally separate finances and the house was hers before the relationship so we think it is only in her name. 

The house is way bigger than 2 people need and I think they (especially the husband) would be much happier in a single-story home.  But due to the reverse mortgage, I don't know that she will ever be able to sell and have enough equity even to downsize.  Sure, she can stay there forever, but when stairs become a big problem and the only full baths are upstairs, what then?  If she'd had sold and downsized and taken a chunk of equity to live on, she would have been so much better off.  I don't know how she thought the reverse mortgage was the best idea.

Don’t  reverse mortgages pretty much cover little old seniors who want to live beyond their means?

That is how I’ve come to view them in recent years as I see more people take on reverse morgages. Yes it is uncharitable of me.

Well, some senior ladies never worked enough to receive social security benefits on their own, so when their partners die they can become cash poor.
Another scenario I've seen play out is high medical costs that sap the life savings of a couple when one of them dies, and the survivor  has little to fall back on.
I have negative feelings towards reverse mortgages because I believe they're often aggressively marketed yo unsophisticated owners as free money.

[reeshau]

Whatever reverse mortgages have become, or are marketed as, they were invented just for that reason:

The first reverse mortgage was reportedly written in 1961 by Nelson Haynes, who was looking for ways to help the wife of his high school football coach stay in her home after her husband died.

https://www.investopedia.com/history-of-reverse-mortgages-5224844

[iris lily]

My immediate experience is with 2 senior citizen people who have reverse mortgages in 3000 square-foot houses. One of those houses was built in 1880. The other house is in a harsh northern climate with acreage that also has to be kept up.

Personally, I wouldn’t take on that financial burden With low income and yeah, they do have low income,but then I’m very conservative.

[yachi]

Well, some senior ladies never worked enough to receive social security benefits on their own, so when their partners die they can become cash poor.
Another scenario I've seen play out is high medical costs that sap the life savings of a couple when one of them dies, and the survivor  has little to fall back on.
I have negative feelings towards reverse mortgages because I believe they're often aggressively marketed yo unsophisticated owners as free money.

Social security can still provide substantial support to senior ladies (or men!) whose partners die:

Surviving Spouse of any age caring for deceased's child: 75%*

Surviving Spouse with a disability aged 50 through 59: 71½%

Surviving Spouse age 60 through retirement age: 71½ to 99%

Surviving Spouse full retirement age or older: 100%




*In this case, the child also receives a payment until age 18, or 19.  The combination of both payments can be more than social security was for the deceased spouse.

[Catbert]

Well, some senior ladies never worked enough to receive social security benefits on their own, so when their partners die they can become cash poor.
Another scenario I've seen play out is high medical costs that sap the life savings of a couple when one of them dies, and the survivor  has little to fall back on.
I have negative feelings towards reverse mortgages because I believe they're often aggressively marketed yo unsophisticated owners as free money.

Social security can still provide substantial support to senior ladies (or men!) whose partners die:

Surviving Spouse of any age caring for deceased's child: 75%*

Surviving Spouse with a disability aged 50 through 59: 71½%

Surviving Spouse age 60 through retirement age: 71½ to 99%

Surviving Spouse full retirement age or older: 100%




*In this case, the child also receives a payment until age 18, or 19.  The combination of both payments can be more than social security was for the deceased spouse.

While I'm sure those numbers are true, probably the more typical situation for the current generation of retirees is that both worked.  If, for example, each spouse is collecting $1100 a month from SS ($2,200 total) when one dies the remaining spouse will only get $100 a month while its unlikely that expenses will drop by half.

[Cassie]

IL, I agree that your friends are being foolish and unrealistic. It’s smarter to own what you can afford than what you desire.

[wenchsenior]

I need to do research on this as well. My father is currently being cared for at home and burning through his cash assets rapidly. He's always vehemently stated 1) that he absolutely doesn't want to go to a home unless there is literally no other option; and 2) that the lovely property he's accumulated is his only and best 'legacy' that he is proud of, and he doesn't want it divided and sold off until he's gone (and hopefully not then).

Unfortunately, those two primary wishes are not easily reconcilable, and he's now got dementia with my sister as POA, and he's burning through his cash at a rate where it will be gone in ~2 years. We are hoping (and he was also hoping when he was still lucid) that he would die before then, but he's shockingly physically resilient despite decades of severe abuse of himself, so we cannot count on him dying before running out of money.

There's a stop gap where perhaps my husband and I could afford to purchase two parcels of his property, thus keeping it 'in the family' while he's alive, but that would still only buy him another 4-6 months of care. And we can't afford to purchase the whole thing while living elsewhere, even if we wanted to move there in the first place, which I'm not at all sure of.

I'm thinking a reverse mortgage might help keep in him the home... I will be researching this.