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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: iminycricket on June 30, 2020, 02:17:44 AM

Title: Paying Off Parents' Mortgage
Post by: iminycricket on June 30, 2020, 02:17:44 AM
My parents are in their mid 60s and have about $XK left on their mortgage (plus $Yk on a home equity loan). With my mother's part time work and my dad's social security, they are just getting by. I'm considering paying off the mortgage portion, thinking this will give them a more stable situation and give my mother the option of retiring. Hopefully it'll also mean they won't need as much financial support in the future.

What I'd like advice on is what/if I should ask for anything in return. I could consider it a purchase of a proportion of their home and ask for that proportion in their will? I could ask for the $XK back in their will (adjusted to inflation?). In those cases, what happens if they decide to sell? I could have them make interest-free payments to me? Or I could consider it a gift and expect nothing back. I have 3 siblings and don't want any inheritance battles driving a wedge between us in a few decades time. How could I formalize an agreement?

I'm trying to strike a balance between being generous, taking care of my parents, but also wanting to make financially reasonable decisions.
Title: Re: Paying Off Parents' Mortgage
Post by: former player on June 30, 2020, 03:00:36 AM
Could you and your siblings each contribute $15k?
Title: Re: Paying Off Parents' Mortgage
Post by: SwordGuy on June 30, 2020, 09:46:18 AM
Could you and your siblings each contribute $15k?

First of all, are your parents financially responsible?   If they aren't, if you pay off the mortgage they'll just get a bigger HELOC and your good work will be for naught. 

Second, if their health allows for it, offer to match every extra dollar they put on the mortgage.   Your dad could get a part time or full time job, your mom could go to full time.   I suggest this because it puts their success partly in their own hands.    If their health doesn't allow it, that's different, but otherwise, their money problems are their own fault.  If it is their fault and they don't have to feel the pain of fixing the problem, they may just get into a financial mess again.

Third, if you're on the FIRE track and have a pretty good income, you can afford to help your parents out and still be financially responsible.   But it's a good idea to get help from your siblings as well.    If your parents need some parenting (as in the prior paragraph) then a united front by you and your siblings will be helpful. 

One option would be to have a mortgage lien against the house for the amount you pay into the mortgage (plus interest).  Payment would be due upon death or transfer of ownership.  The lien would have to be settled by their estate.  A will can be changed and there's nothing you can do about it, and a will can also be challenged.   The lien will stand, regardless.   Your risk then would be the house wouldn't be worth what's owed by the lien, either from declining property values overall or lack of maintenance.

If my parents had needed help I would have willingly worked a few extra years -- but only if that sacrifice wouldn't be squandered by foolish spending immediately afterwards.    How long would it take cover the $60K of the mortgage if you did the entire amount?

Best of luck.
Title: Re: Paying Off Parents' Mortgage
Post by: AMandM on June 30, 2020, 11:12:01 AM
I take it that your idea is that without the mortgage payment, your parents would be able to live comfortably within their means. This is a generous plan, but I think there are several questions to be answered about whether this scenario is a good plan, before getting to the question of how to compensate you.

(Written out as a list of questions, I realize this sounds like a hostile interrogation, but I don't mean it that way--it's just that there's a lot we don't know from your post.)
Do you know enough details of their finances to be reasonably sure that paying off the mortgage will achieve the goal?
Would your parents welcome this?
Are your parents financially disciplined, so that they would not take the elimination of the mortgage expense as licence to rack up more spending?
What will happen once your mother retires? Will their income drop and will it then be necessary to pay off their HELOC as well to keep their expenses under their income?
Do your siblings agree that paying off the mortgage would be a good step? Would they be interested in contributing? If not, would they agree to repay you from the estate?  A lot depends on your relationship with each other, but I definitely would not proceed without talking to them.

As a general rule, I would only do this if you are prepared to treat the payoff as a gift. You might well have a repayment plan of some sort, but if for some reason you don't get the repayment, you want to be able to let it go rather then getting into legal battles.
Title: Re: Paying Off Parents' Mortgage
Post by: Fishindude on June 30, 2020, 11:21:23 AM
This would most certainly be a gift.  Do not ever expect to get any of it back.
You really need to pay off the whole thing including the home equity loan to help them out significantly.   Having zero house payment could be a big boost.
Title: Re: Paying Off Parents' Mortgage
Post by: Frankies Girl on June 30, 2020, 12:03:39 PM
I get the reasoning - you love them and want them to be safe and comfortable.

But the #1 main event question: Have they asked you for help?

Mortgages are one of the best/easiest debts to manage. In general, they can't lose their house unless they bungle their money situation badly. The fact that they have a HELOC on top of still paying off a conventional mortgage is bit concerning just taking the basic facts you presented - mid6os, father on SS and mother works part time and they are just getting by - but is the "just getting by part" (you thinking they're hurting or struggling) just what you think/believe, or have you confirmed this through a review of their debt/income/savings/investments?

It's weird to me you believe they are in a bad money situation, but then also are concerned about inheriting from them. There's a disconnect here. How could they have enough to pass on to heirs if they are just getting by? If they are have their money locked into a house (no real money/investments but very expensive property) then that's actually not that big a deal. Worst case, your mother quits working and their combined SS isn't enough, they could sell the house and move to an apartment/condo/rental property and get the equity out of the current property.

Has your mother even said anything about wanting to retire? Some folks like working part time as long as they're able - not just for money, but because it gives them structure, social interactions, define themselves through their work, enjoy the work environment, etc.

But as the others have mentioned, there are other factors that you can't control, and things not being addressed or that may make this not a "throw money at it" type of situation. I'd start with asking them if they are doing okay and listen to what they say. And then asking them if they think they need help with figuring out financial resources/debts and what is available for them as they near retirement age, and go from there. It may be as simple as they need help with a plan/budget, or all the way up to their children helping out financially. But I would not proceed without their complete openness to put all the info out there along with the invite to step in and help them figure everything out.

And if you do end up offering financial help, you need to make sure whatever you all decide, everyone is aware, there is no ambiguity, no I sort of thing this is a gift, but REALLY would appreciate it if they paid me back type of thing. Work it out like reasonable adults.
Title: Re: Paying Off Parents' Mortgage
Post by: iminycricket on July 02, 2020, 12:46:56 AM
Thanks for all your responses so far.

To clear up some questions here's some additional info:
-I'm currently about 10 years away from financial independence. This would set me back about 3-4 years. Retiring before my mother doesn't sit well with me
-My parents aren't frivolous with their money. They have excellent credit. The home equity loan was a mistake they made before the financial crisis, when they needed a new roof and were told there house was worth twice as much as it is. They regret it.
-I'm sure my mother would like to retire. She often mentions feeling burnt out
-They haven't asked for help, but they aren't the type to.
Title: Re: Paying Off Parents' Mortgage
Post by: dragoncar on July 02, 2020, 01:22:19 AM
Consider tax implications.  Maybe it's nothing besides form 709 or maybe you're married and you can stay under the $15k exemption by giving $15k to each of your parents and your spouse fives $15k to each.  Or give $15k each at the end of 2020 and the beginning of 2021.

You could also provide several zero or low interest loans (say six $10k loans, 30-year, unsecured balloon payment) which can be forgiven in stages over time.  Or not forgiven and simply claimed against their estate when they die (thus no need to change the will but you should probably let your siblings know what's happening).  If they die with no money, it ends up being a gift.  If they die with plenty, you get your loan paid back plus whatever share of what's left.  Interest could be due at the end.  I don't know what legal formalities would need to be followed with these notes but they aren't usually that complex there will be templates for your state.  I'm guessing it wouldn't need to be recorded, but notarized would help.

I'm not a tax advisor or tax lawyer just spitballing so please confirm and seek your own counsel.
Title: Re: Paying Off Parents' Mortgage
Post by: Playing with Fire UK on July 02, 2020, 01:42:30 AM
Consider that what you mean as a generous and loving gift could damage the relationship.

My partner and I helped out my in-laws financially and it was an unmitigated disaster. The financial damage we can recover from but the relationship damage is lasting.

If they don't feel they need the money, and they aren't the type to ask, this could stir up all sorts of feelings and shame about them needing your help or you doing "better" than them financially.

If they do need the money, you might accidentally teach them that they have an infinite money tree where they used to have a child. If you can come up with $60k unasked for, who will they call when they want to bail out a distant cousin or the roof needs a repair or they feel like treating themselves?

Consider how you would feel if you paid off the mortgage and they remortgaged to buy a fancy car, or go on holiday, or gave money to each of your siblings.

You are probably thinking that your parents wouldn't do these things. That's fine and you love them and I'm sure they are great people. I thought all those things too.

If I could go back in time to speak to myself a decade ago, I'd tell myself never to mix money and family. I can't do that but I can tell you.
Title: Re: Paying Off Parents' Mortgage
Post by: Frankies Girl on July 02, 2020, 02:24:30 AM
Thanks for all your responses so far.

To clear up some questions here's some additional info:
-I'm currently about 10 years away from financial independence. This would set me back about 3-4 years. Retiring before my mother doesn't sit well with me
-My parents aren't frivolous with their money. They have excellent credit. The home equity loan was a mistake they made before the financial crisis, when they needed a new roof and were told there house was worth twice as much as it is. They regret it.
-I'm sure my mother would like to retire. She often mentions feeling burnt out
-They haven't asked for help, but they aren't the type to.

This sounds like a savior/rescuer thing more than them genuinely needing help and asking you to step up. I think the fact you're not comfortable being FIRE before your mom is something you need to figure out on your own and separate the emotional aspects from the logic here. One is not related or relevant to the other.

Your mom mentioning she feels burnt out is an opening to discuss things on an adult to adult level. She may want to retire, or she may just be venting about work frustration. You are making assumptions. The fact that you believe your parents aren't the type to ask for help - this an opening you need to take and tell them you are worrying about their financial situation.

Don't skip the steps. You are all adults, and you need to talk to them if only to settle things in your own mind that you don't have to support or take care of your parents and they may or may not even realize how you're feeling about the stuff they do share with you. They may tell you that's really sweet of you to care so much, but we're fine.

So ask them to talk.

Tell them you are concerned about their future, and worried they may not have money to do the things they need/want to do, and offer to sit down and help go over debts and income, finances, budgets, available resources, and their retirement plans (if any) or if they want help to get their ducks into rows. If it turns out they are in dire straights and your offering a loan or other $ is truly going to help and not hurt their situation (or your relationship with them and the siblings), then you can go on from there, but you can't do this stuff without talking and getting everything out in the open and not making assumptions or letting feelings/embarrassments/pride get in the way.

Title: Re: Paying Off Parents' Mortgage
Post by: Ze Stash on July 02, 2020, 06:39:53 AM
Adding to the suggestion of others to get your siblings on board with this: Does it have to be a lump sum payment of 60k to pay off the mortgage?

Offering the full 60k reveals that you are in a position to hand out this kind of money, which we don't know whether your family already knows or whether you want them to know or not. It also could set a precedent to be asked for more money down the line like others have mentioned, not only by your parents but also by other family members who will find out that you paid off your parents mortgage.

Asking your siblings to split the full 60k might also be a big request depending on their financial situation and might create feelings of shame on their part for not being able to pitch in or resentment simply because they do not want to offer that kind of support and feel pressured to do so.

You could however, offer to take over the monthly mortgage payments for them and potentially split them with your siblings. This increases your parents liquidity situation by the same amount, while not revealing that you have 60k just laying around. It is also generally advised on this board, to not pay off your mortgage early. This should especially hold for someone else's mortgage. Your parents will reap most of the rewards of early repayment, which are mostly intangibles like ease of mind, while you forego the investment returns on your initial 60k. Additionally your siblings might be a lot more inclined and able to pitch in with this likely small monthly sum. All siblings sharing the mortgage payments equally would also eliminate any inheritance issues.

Title: Re: Paying Off Parents' Mortgage
Post by: Steeze on July 07, 2020, 06:47:34 PM
If I bailed my parents out of their mortgage there is a 100% chance of them doing stupid things with their extra cash flow. Even if I took equity in their home, it would just enable them to make stupid decisions. I guarantee they would have an RV in their driveway within weeks.

For now their mortgage gives them a goal and a reason to be somewhat disciplined. Iíll keep stacking my own chips until they really need it - I can help them out more later if I help myself out more now. At least I know my hard work is being invested properly.

I have told them that I plan on being there for them when they canít work anymore since they will only have SS income. Iím not going to let them go hungry or not afford medication - but I donít need to finance their bad habits either. Dad will retire in 4 years, mom in 7. I should be FI in 7. I will plan on supplementing their income after that.
Title: Re: Paying Off Parents' Mortgage
Post by: Lmoot on July 17, 2020, 01:38:35 PM
I agree with others, I'd be wary about whipping $60k out of the wallet along with the attention and expectations it would attract. Couldn't you help them help themselves? Offer to co-sign a refi for another 30 years, maybe pay off some of the loan to get the payments even lower, pay for the closing costs.

With the combo of stretching the mortgage, paying some down before the refi, possibly buying points, and today's interest rates, it could be enough of a boost without you having to give so much. You could even go further and de-escrow the annual costs (insurance and taxes), and offer to pay that so that all they need to be responsible for is the reduced mortgage. Then if something happens financially advantageous (they sell the house and get something cheaper, decide to earn income in retirement, decide they hate retirement, they inherit money, win the lottery, etc), they can take over the annual costs and you'll be off the hook.
Title: Re: Paying Off Parents' Mortgage
Post by: Model96 on July 17, 2020, 03:45:04 PM

Firstly speak with parents and siblings about a lien if that works for you and them. Seems to me  that any other option is a big risk of driving wedges into family relations somehow in terms of inheritance and wills and entitlements.
And make sure you can cope with them then having spare cash to burn .... if you now don't!
Title: Re: Paying Off Parents' Mortgage
Post by: Villanelle on July 17, 2020, 04:12:17 PM
It seems like a terrible idea in most cases because there's no way of knowing they aren't going to use their newfound financial freedom to buy crap instead of actual freedom.  You say they are not financially irrespoibsle, but a roof (that I assume was needed, so whether they paid for it via HELOC or not, they would still have done it) isn't what has them in their mid 60s barely scaping by.  Unless here's some major story (hundreds of thousands in medical debt, sustained job loss, etc.) there is a reason they got to their golden years and are living hand to mouth-ish.  Just because they don't drive fancy new cars and drink $500 bottles of wine doesn't mean they don't make bad choices with their money.  If they are financially responsible, why are they 60+ with no meaningful savings and no plan for retirement?

Getting the money back in a will is a terrible idea.  It's not binding (they could change the will) and if there is no money when they die, there's no money.  And it can create big issues with siblings.

Would you be interested in buying the home from them at FMV minus realtor fees and renting it back to them?  I don't love this idea either, but it's one option to consider.  It could make financial sense given various tax deductions, etc.  Possibly.  My parents' neighbors did this with their kids--the daughter and her husband bought the house and rent back to the parents and suddenly home repairs are tax deductible (but of course the rental income is taxable).  But the numbers made great sense for them.  HOWEVER, the parents were extremely financially responsible and this was done to help simplify things (one parent has an Alzheimer's diagnosis and he's the one who handles many of the home and financial matters) and because the number made it so everyone came out ahead. 

Given that they haven't asked (and presumably haven't dropped hints), I think it's may well me embarrassing, at a minimum, if you make this offer.  But if you are set on doing it, I would explore a lot of other options. 
Title: Re: Paying Off Parents' Mortgage
Post by: Paul der Krake on July 17, 2020, 07:15:05 PM
They decided to cut their earning potential by about 75% before paying off the mortgage when Dad retired and Mom went part-time. "Getting by" seems like the logical state of the world, given the choices made.

Or was this situation forced upon them?