Reverse Mortgage? Like I'm 5, please.

[TR]

My mom is considering getting a reverse mortgage on her home. She's saying it's not like it "used to be" and they're not bad anymore. I don't know what that means. Her older brother (who worked at a bank in the fucking 60's-80's) has one so she thinks it must be a good idea.

What will I have to do when she dies or has to be moved to some kind of retirement home? Is it just that it will have less equity when I have to sell it or assume the mortgage? She has about $380k equity now.

I just don't know anything and I'm not local to her so I don't know what these people are telling her and it FEELS like a scam, but she's not a stupid person so I don't know. But it has me kind of freaked out. As the only child of a single parent I worry a lot because if stuff goes wrong it's all on me to help with.

ETA: Apparently it's now called a Home Equity Conversion Mortgage. Guess they're trying to re-brand.

[mainelyfoolish]

It’s not a scam, but it’s not “free money” either. Just like any other mortgage, there is a significant up-front cost and you accrue interest on the loan, except your balance owed goes up instead of down, and you’re still responsible for paying taxes and insurance.

The loan is payable when the borrower dies or ceases to use the home as a primary residence, so if anyone else lives in the home, that could cause a problem. Is there a possibility she might need the equity to pay for future assisted living care? Does she care about leaving behind anything of value to her family? (Not saying she should, but she needs to understand that her whole home could go to the bank after she dies.)

My question for your mom is why does she think she needs the reverse mortgage? Are there other ways to pay for what she needs?

This website has good info: consumer.ftc.gov/articles/reverse-mortgages

[TR]

Thank you! She lives alone, so other people living in the house isn’t a problem. We only talked for a short time about it today, but her reasoning was that she could then take less out of her retirement accounts, which counts as income and is taxed. She ended up owing more than she expected on her taxes this year and I think that freaked her out.

[wanderingback]

I know you’re also an only child. My mom also briefly mentioned this to her a few years ago and I just told her I didn’t think it was a good idea lol. It seemed complicated to me but I honestly didn’t look in to the details. Sorry prob not super helpful/practical but I know as an only child it can be tough to navigate this stuff.

[mainelyfoolish]

I don’t see how this could work as a tax mitigation strategy. It’s true that the payments she would get from the reverse mortgage would be tax free when she gets them, because she’s just taking back her own money out of her home equity. But when she passes, all the tax deferred money left in her retirement savings will still be taxable to the beneficiary, plus now her estate is obligated to repay the mortgage with interest.

[TR]

May 19, 2024 10:47:02 GMT -5 mainelyfoolish said:

I don’t see how this could work as a tax mitigation strategy. It’s true that the payments she would get from the reverse mortgage would be tax free when she gets them, because she’s just taking back her own money out of her home equity. But when she passes, all the tax deferred money left in her retirement savings will still be taxable to the beneficiary, plus now her estate is obligated to repay the mortgage with interest.

I don’t mind taxes coming out of her retirement when it passes to me. I do wonder about selling the house to pay it off, the previously posted info page says it’s “non-recourse” meaning I wouldn’t be liable for anything over what the house is worth at that time, even if she owes more. But who decides what it’s worth and what if I can’t sell it for that much? I doubt she’d go through all of her equity before she dies, but you never know. Especially if some kind of assisted living or nursing care is involved.

[TR]

I don’t want my concerns to sound like I’m just worried about my inheritance. I’ve never counted on getting anything from either of my parents. In fact, I expect my dad’s estate/debts to be a huge mess that I have to deal with alongside my stepmom (he doesn’t have a will and in his state that means it goes 50/50 me and her). I just hope this isn’t going to end up costing me money. Or a ton of extra time and headache.

[SusanBAnthony]

My concern would understanding how it works if she goes into a care home.

For example:

She spends all 380k, needs to go into a care home. Do you just give the house to the loan company and its not her problem?

What if she lives in the house a long time and now owes more than it's worth. She needs to go into a care home. What happens?

I would want to understand all those possible scenarios. I would also probably engage a fee only financial planner and have them compare the mo wy she is "saving" with taxes to the interest she is paying. I have my doubts that it's really going to save anything. The government's going to get their money, and in the reverse mortgage scenario the loan company takes a cut too.

[quesyrah]

My parents had a reverse mortgage. My dad did it in 2014 when they had $185,000 left on their mortgage and I’m not exactly sure why he did it.

In 2021 when I ran into a crisis with my parents and had to move them to memory care I sold their house.

The house sold for $975,000 and the reverse mortgage company got $485,000.

Everyone I talked to said the benefit to my parents was they would get a payment each month. I combed through years of statements and they were absolutely not receiving any money. They just didn’t have to make their mortgage payment.

[quesyrah]

May 19, 2024 11:32:48 GMT -5 TR said:

I don’t want my concerns to sound like I’m just worried about my inheritance. I’ve never counted on getting anything from either of my parents. In fact, I expect my dad’s estate/debts to be a huge mess that I have to deal with alongside my stepmom (he doesn’t have a will and in his state that means it goes 50/50 me and her). I just hope this isn’t going to end up costing me money. Or a ton of extra time and headache.

It won’t cost you money. If there is a profit when the home is sold you get whatever is left after the reverse mortgage has been paid off. If there is no profit you just walk away and the reverse mortgage company has to deal with it

[mainelyfoolish]

May 19, 2024 11:26:26 GMT -5 TR said:

May 19, 2024 10:47:02 GMT -5 mainelyfoolish said:

I don’t see how this could work as a tax mitigation strategy. It’s true that the payments she would get from the reverse mortgage would be tax free when she gets them, because she’s just taking back her own money out of her home equity. But when she passes, all the tax deferred money left in her retirement savings will still be taxable to the beneficiary, plus now her estate is obligated to repay the mortgage with interest.

I don’t mind taxes coming out of her retirement when it passes to me. I do wonder about selling the house to pay it off, the previously posted info page says it’s “non-recourse” meaning I wouldn’t be liable for anything over what the house is worth at that time, even if she owes more. But who decides what it’s worth and what if I can’t sell it for that much? I doubt she’d go through all of her equity before she dies, but you never know. Especially if some kind of assisted living or nursing care is involved.

The market will determine the value of the home when you go to sell it. A non-recourse loan is good, but it most likely won’t make a difference because the reverse mortgage lender won’t let the borrower take out anywhere near 100% of the appraised value. 

I understand you’re not concerned about receiving an inheritance, but I would still worry about your mom’s ability to care for herself. If she ends up in a scenario where she will deplete her savings, having had the reverse mortgage will mean she has less money overall to care for herself. I have no idea how much money your mom has in tax deferred retirement savings, so maybe this isn’t really a concern.

Regardless of a reverse mortgage, you mom still has to take (and pay taxes on) her required minimum distributions. 

[quesyrah]

May 19, 2024 12:19:45 GMT -5 mainelyfoolish said:

May 19, 2024 11:26:26 GMT -5 TR said:

I don’t mind taxes coming out of her retirement when it passes to me. I do wonder about selling the house to pay it off, the previously posted info page says it’s “non-recourse” meaning I wouldn’t be liable for anything over what the house is worth at that time, even if she owes more. But who decides what it’s worth and what if I can’t sell it for that much? I doubt she’d go through all of her equity before she dies, but you never know. Especially if some kind of assisted living or nursing care is involved.

The market will determine the value of the home when you go to sell it. A non-recourse loan is good, but it most likely won’t make a difference because the reverse mortgage lender won’t let the borrower take out anywhere near 100% of the appraised value. 

I understand you’re not concerned about receiving an inheritance, but I would still worry about your mom’s ability to care for herself. If she ends up in a scenario where she will deplete her savings, having had the reverse mortgage will mean she has less money overall to care for herself. I have no idea how much money your mom has in tax deferred retirement savings, so maybe this isn’t really a concern.

Regardless of a reverse mortgage, you mom still has to take (and pay taxes on) her required minimum distributions. 

This, this 100% this. I never would have imagined having the crisis we did and needing to move my parents ASAP.

You need to make sure that she’s still financially able to cover long term care if she needs it.

If I hadn’t sold at the height of the crazy Covid housing market, we would have potentially been screwed because there wouldn’t be much left after the RM had been paid off.

My parents luckily had significant retirement savings but at $16,000 a month which goes up every year, it wasn’t going to last forever.
We needed the house profits.

I was wholly unprepared for them to both die just shy of a year of living in memory care so there ended up being a significant inheritance but you just don’t know.

For your planning purposes, I have since learned that the average stay in a nursing home is 2.5 years.

[TR]

Thank you quesyrah & mainelyfoolish! Very helpful to know what to talk to her about. She has said she would get monthly payments so I’ll make sure to get her to double check that.

[CrazyLucky]

My dad is 80 and is still working because he can't afford to stay in his house if he doesn't. I hate it for him, but he is not budging on the idea of moving to a senior or veteran rent controlled apartment. So I started looking into reverse mortgages as well, and I appreciate this thread. As far as getting a monthly payment, I think you can but don't have to. In my dad's case, I think it would be a good idea. My mom has passed, so he's in the house alone. None of us is expecting any inheritance, so no concern there. If he didn't have to pay the mortgage, he could live off of his tiny pension and social security. But I don't feel very confident in that so I haven't tried to push it.

[mcsangel2]

May 18, 2024 16:43:32 GMT -5 TR said:

Thank you! She lives alone, so other people living in the house isn’t a problem. We only talked for a short time about it today, but her reasoning was that she could then take less out of her retirement accounts, which counts as income and is taxed. She ended up owing more than she expected on her taxes this year and I think that freaked her out.

This is an absolutely terrible idea. If she's able to cover her expenses with her retirement account and SS money, she should absolutely not be getting a reverse mortgage. 

[TR]

May 20, 2024 12:14:01 GMT -5 mcsangel2 said:

May 18, 2024 16:43:32 GMT -5 TR said:

Thank you! She lives alone, so other people living in the house isn’t a problem. We only talked for a short time about it today, but her reasoning was that she could then take less out of her retirement accounts, which counts as income and is taxed. She ended up owing more than she expected on her taxes this year and I think that freaked her out.

This is an absolutely terrible idea. If she's able to cover her expenses with her retirement account and SS money, she should absolutely not be getting a reverse mortgage. 

Terrible because it will end up costing her more money? 

[tacokick]

There are fees (sometimes quite a few) and if you get a lump sum it will count as an asset if she needs to ever apply for Medicaid. It can affect your social security benefits.

It will make eventually dealing with her estate less straightforward.

If she can pay her bills now, I can’t see any upsides

[quesyrah]

May 20, 2024 7:14:58 GMT -5 CrazyLucky said:

My dad is 80 and is still working because he can't afford to stay in his house if he doesn't. I hate it for him, but he is not budging on the idea of moving to a senior or veteran rent controlled apartment. So I started looking into reverse mortgages as well, and I appreciate this thread. As far as getting a monthly payment, I think you can but don't have to. In my dad's case, I think it would be a good idea. My mom has passed, so he's in the house alone. None of us is expecting any inheritance, so no concern there. If he didn't have to pay the mortgage, he could live off of his tiny pension and social security. But I don't feel very confident in that so I haven't tried to push it.

Is it an option for him to sell his house and move to a cheaper/smaller one?

[bee20]

Read the terms carefully, it was a big source of heartache when a family member had to move into assisted living. The terms said after 6 months living outside of the house (including in assisted living) the house would need to be sold to settle the reverse mortgage. The family member was still adjusting to assisted living, frankly probably still thinking of moving home, and definitely the family wasn't ready to deal with all the stuff on that timeline. Another family member had a reverse mortgage that just requires being paid back upon sale and the children of the deceased are still living in the home a few years later.

Basically, it's not necessarily a scam, make sure there is a long or unlimited period before you have to sell so you're not scrambling to deal with healthcare stuff and house stuff, and make sure the terms and fees are reasonable.

[k3am]

The only reverse mortgage scenario I've heard of where I went "Damn, that makes sense!" was DH's "great aunt" (friend of grandma, I think?). She bought her house for basically thirteen pennies and a handshake in the good old days, and the value went through the roof over the years. She had no living siblings and no children. When her health turned, she was able to reverse mortgage her home and live in the property with round the clock health aides for years. I don't know all the details, but at the end of the day, the house went to the bank and there was no one that particularly cared.

But that is not generally the scenario or outcome we hear about when it comes to reverse mortgages.

[spinnaker5]

She (or you) might want to talk to an attorney who specializes in elder law before doing anything. They can help with forward planning for senior care/assisted living including how to deal with house sales and other assets, navigating Medicare benefits eligibility etc.

nelf.org/

[TR]

UPDATE: The reverse mortgage guy got back to her yesterday with "the numbers" and because she's so young (relatively speaking, she's 66) and the rates are so high she'd only be able to access, like, $5,000 so she's not doing it. She may consider it further into the future, but we can see what the situation looks like then.