Wednesday, September 24, 2008
Children with aging parents are facing some very difficult choices. Parents may not fully understand the consequences of poor end of life decisions. The worst of which is what to do when the only assets left are the home parents have lived in forever and income sources based on retirements and social security started many years ago and have not kept up with inflation and living costs.
Up to rescue us all comes the banking industry with their latest scam to relieve the elderly of their last remaining asset of any value. They will advance a line of credit based on the age of the youngest title holder of the home and it will be about 40-60% of the current market valuation of the property. Front end loading costs will be $20-$25,000.00 to satisfy all the HUD, title insurance, mortgage default insurance and commissions that come off the top. Parents can expect a montly revenue stream of $1-2K/month depending on the asset or they can blow the entire line of credit on that trip to Europe before they die. The homeowners must continue to pay property taxes, insurance, homeowner association dues and upkeep/maintenance costs or face foreclosure.
The ugly side of this deal is once folks who take out these loans and can no longer live in their homes, the note is due and payable immediately. A reasonable amount of time is given to liquidate the property by the bank. The bank will get their money plus all interest that has accrued on the line of credit. Interest rates are not fixed, they are variable and reset regularly mostly up and not down.
What happens if the people taking out the loan squander the line of credit or become incompetent to manage their affairs or income sources evaporate upon the death of a spouse. More than likely the surviving spouse will no longer be able to meet the financial obligations of property taxes, insurance, homeowner association fees and upkeep on the home. Again, it will be move out time and the house sold at the pleasure of the bank.
What happens when both the husband and wife end up in assisted living or skilled nursing environment due deteriorating health or other unforseen condition? The house is sold immediately out from under them and the bank gets their money. Any residual goes to the property owners once the place is sold and expenses rekated to satisfying the reverse mortgage and sale commissions and expenses are paid.
Best advise, sell the house and rent it back from the buyer or move to another home you like as a rented property. You will get full market value for the asset and you or your estate trustee can manage the net profits to pay your expenses. Cash and dividends generated from the sale of the property will go a lot farther toward a dignified exit from this life than possible with a reverse mortgage. Should either the husband or wife need to be moved to an assisted living or skilled nursing environment the cash is there to pay for this expense.
A reverse mortgage is just another financial instrument with a "funky smell" that preys on the elderly in the name of "providing them with easy access to money". Their big sell is the heirs are only interested in cleaning out the estate and they may as well do it themselves and go out in a blaze of fun and glorious excess before they die. No mention of conserving cash assets is mentioned. Life is for the living and "you" deserve to spend this money and your future be damned.
The real challenge for all of us is to figure out how to make certain that our money will outlive us and not the other way around. A reverse mortgage does not insure this will happen.
Elderly people in deteriorating health circumstances owe it to themselves to visit assisted living providers properties and weigh what they have to offer. A good number offer graduated care options starting with independent living, assisted living and skilled nursing all in the same environment. They are not death camps!
Final word, death is not optional so plan for your exit.
Posted by Paul Alldredge at 10:00 AM