Author Topic: Father looking for funds in old age...reverse mortage vs. home equity loan?  (Read 1572 times)

Daisy

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My father is in his late 80s and has high expenses due to home health care recently. He keeps talking about getting a reverse mortgage. He has a paid off house.

My only experience with reverse mortgages is one of the units in my condo building had an owner with a reverse mortgage die, and the condo has been empty for 5 years as the bank is going after the family to pay the loan back or give up rights (we are not sure due to privacy concerns).

My father has a good friend that was a banker that told him reverse mortgages can be a headache for heirs.

Me and my siblings just want the best for our father if he truly needs the funds then maybe he should do the reverse mortgage.

I then suggested that a home equity loan could be an option.

It looks to me that the difference between reverse mortgage and home equity loan are when the fees are due. I think the fees are tacked on to the balance of a reverse mortgage, ballooning them to an unpayable level. With a home equity loan, he can get a lump sum (to invest), and then he pays the loan (principal and interest) every month.

Of course, his biggest problem is large expenses, which I am working to reduce as I have done with my own expenses. Home health care is expensive though! I am trying to cut the rest of the expenses down.

What say you MMM forum?
« Last Edit: November 30, 2018, 08:40:28 PM by Daisy »

theolympians

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How about selling his house and downsizing? That should free up some funds. Or, sell the house and have him move in with a family member. If you, or the family member, become his caregiver you might be eligible for funds from the state you live in to help you.

I don't like home equity or reverse mortgage loans. I think reverse mortgages are designed to take the house in the end. You wrote about taking out a home equity loan and investing a large portion, and make the payments. I think that has been discussed here on this site. Given the principal and interest, I don't think investments would outstrip those, and likely wouldn't be a good way to go.

ILikeDividends

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Here's a similar situation, and possibly a creative alternative.

My mother (a widow) lives in her own paid off home.  She has a will and a trust that names me as the first executor and successor trustee.  My brother and I are 50/50 beneficiaries of the trust.  No other beneficiaries.  The house is held in title to the Trust.

My mom's only source of income is social security.  No liquid assets.  Her income is no longer enough to cover her monthly expenses.  She has no emergency fund.  Her only asset is her house.

My mom and I have agreed that I will keep her in her house and fund the monthly expense shortfall and fund all emergency expenses in the form of loans rolled into a demand promissory note ("demand" means she never has to make monthly payments on the note) at 3% APR; enough to hopefully protect me from inflation risk, but still a much better rate than she could get with a mortgage.

Since I will never issue a "demand for payment," the note becomes due when she dies, or when 30 years elapses (she is 88 right now); hopefully a long time from now, but that's beside the point.  In the unlikely event that 30 years elapses before default ("death" is a stipulated default), I will simply roll the old note into a new note with interest accrued.

When new expense outlays for my mom exceed a few thousand dollars, I simply roll the old note into a new note to cover those new expenses, and tear up the old note.

My mom gets to stay in the house she loves, and she will never have to make a payment to me for as long as she lives.  As a creditor, I will eventually be repaid by her trust, before I and my brother are paid whatever remains as beneficiaries.

This is kind of specific to my own personal circumstances, but I hope it provides an out-of-the-box kind of approach to thinking about this that might give you some ideas.

ETA: Estates and trusts have to repay creditor claims before they pay out to beneficiaries.  I am not worried about repayment.  Since I will also be her trustee, I am even less worried.  This promissory note is accounted for in the Fixed Income portion of my AA.  If I die before my mother, no one will be left alive to make a claim on my promissory note, as it will not be a listed asset in my own trust; in which scenario my younger brother hits the jackpot.

My mother changed my infant diapers for no other reason than that she loved me. Now I am basically my mother's personal banker for the same reason.
« Last Edit: December 01, 2018, 02:59:16 AM by ILikeDividends »

2Birds1Stone

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Thank you for sharing that @ILikeDividends. Super helpful!

Did you require a lot of legal help/incur high legal fee's to get that set up? Or is it possible to almost DIY?

Daisy

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How about selling his house and downsizing? That should free up some funds. Or, sell the house and have him move in with a family member. If you, or the family member, become his caregiver you might be eligible for funds from the state you live in to help you.

We kids have suggested that for a long time, but they don't seem to want to move. I think it would be the best thing for them. He may decide to do this if the finances keep dwindling away on home health care.

I don't like home equity or reverse mortgage loans. I think reverse mortgages are designed to take the house in the end. You wrote about taking out a home equity loan and investing a large portion, and make the payments. I think that has been discussed here on this site. Given the principal and interest, I don't think investments would outstrip those, and likely wouldn't be a good way to go.

Yes I thought the same. But it might be a way for them to tap the equity during the final years of their lives. Once they pass away, we can sell the house to pay off the home equity loan.

This is so depressing to talk about passing away and all. Unfortunately, we have to plan for them and their best interests.

Daisy

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Thanks @ILikeDividends . There is a lot to absorb in your post and I will try to understand it all and maybe discuss with my father and siblings.

ILikeDividends

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Thank you for sharing that @ILikeDividends. Super helpful!

Did you require a lot of legal help/incur high legal fee's to get that set up? Or is it possible to almost DIY?
The promissory note is super DIY-able:

https://www.legalzoom.com/forms/promissory-notes

You can create as many notes as you want for $100/year, or pay per note (2 notes will slightly exceed the annual $100 fee).  Since I'll need to roll notes several times a year, I went with the annual subscription.

Wills and trusts are another matter.  I wouldn't use legal zoom for that.  State probate laws vary, so you want an estate attorney who is expert in your state's probate laws to do those documents, if they aren't already in place.  The cost of setting up my mom's pour-over will and trust was a flat $2700.  The fee included a re-title of the house to the trust, a power of attorney document, and a medical care directive.

Legal guidance for executing the will and the trust is a separate fee.  I have experience as my late uncle's executor and trustee.  Even at that, when the time comes to take on the role of successor trustee for my mom, I will hire an estate attorney to make sure all is settled according to the letter of the law.

Executors and trustees are fiduciaries; those aren't roles to be taken on lightly.  The fiduciary can be held personally and financially responsible for legal missteps, so you need to get this part right.  The trust will pay for the attorney. In my state, the attorney's fee is codified into law; a sliding scale formula based on the value of the assets in the estate/trust.
« Last Edit: December 01, 2018, 09:20:47 PM by ILikeDividends »

kendallf

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I did something similar to ILikeDividends; my brother and I set up a family funded reverse mortgage and we pay our mother each month.  I used a company called National Family Mortgage to do this.  After she passes, the loan will be paid from the estate proceeds (basically when the house sells, as she has no other estate). 

The advantages of this are relatively low fees and interest, no creditor to force the sale of the house immediately if she were to have to go into managed care, and the fact that we'll get money back later even if she has medical expenses that eat up the rest of the estate, as the lien will take precedence.  We have siblings who aren't able to contribute monetarily to her support, so this was a way to formalize and document what we give her in order to (hopefully!) avoid rancor later.

The disadvantages are that we need to be able to cash flow her expenses now, of course.  We also have to do all of the house maintenance, etc. but we were doing that anyway.     

We are a couple of years into it so far and it's worked out decently thus far.  As long as she's healthy and able to stay, and doesn't want to leave, we'll try to make it work. 

 

Wow, a phone plan for fifteen bucks!