So, here's the situation:
1. Two elders on their 2nd marriage, living on their own, and five adult children:
2. "Parent A" gets about $1700/mo (social security) and owns the house where they both live. "Parent B" gets about $4500/mo (social security, pension, some other income), just sold the house they owned when the two got married about 15 years ago for about $600K (before taxes).
3. Both signed a financial prenuptial agreement.
4. Both have health issues,"A" moreso than "B". A part-time caregiver comes to the house a couple of times per week, and both parents are splitting the costs
5. All the children believe the parents should move into assisted living (and both parents have longterm care insurance which should cover a large portion of the expenses, although there is a 90-day deductible.
6. "A" has a $100K home equity loan on the house, about three-quarters of which remains.
At this point, based on current expenses (and both parents are reasonably responsible with their money), "A" will run out of money in about a year--which is where the confusion/concern comes in. Who should provide financially for "A"? The spouse? The kids? Does a 3rd party need to come in to figure this out? "A"'s children are both fulltime employed adults; one is pretty well off, but is supporting childen (one of whom has a serious medical issue), and both would obviously like to save for their own retirement. "B" would like to help fund the her children's kids' college education.
Yeah, it's quite a mess. I think you can make the case for a variety of scenarios, but I figured I'd crowdsource an opinion or two. Thanks in advance for your advice.
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What had happened with RM's (and why the feds have restructured the eligibility on those that are federally backed) is that RM were being done on properties that were over appraised and with borrowers with limited income. RM was a band-aid on a much much bigger financial problem for the elder. The RM $ was maybe 50% of a crappy but over appraised house with decades of delayed maintenance. The RM doesn't care as it;s federally backed so if that sucker sold for 50K and the loan out was 100K the feds (& taxpayers) paid the difference. It was in the RM's interest to have defaults as the RM got their $ quicker. Often the homeowner defaulted on the terms of the RM as now the RM sent out a company to do an evaluation on the home after loan issued and finds deficiencies that the homeowner is responsible for paying as it's part of the "required" on the property. Like they drive by and do a deficient roof report and owner has to get roof repaired or replaced and if not they are not compliant for RM agreement and loan gets called in.
New rules now require the borrower to show they have the ability to pay for normal costs on the home and if they don't have the income then they do something like an escrow account for 3 years (I think it's 3) for what those costs should be in order for the federally backed RM to be approved. The federally backed ones now have all sorts of safeguards like house has to be appraised but are harder to qualify for.
You or bro may want to check out the LTC costs in your area and what their polices are for LTC insurance acceptance. My mom;s NH would NOT take LTC insurance at all as the reporting required for the various companies was paperwork heavy and morphing (like having to detail staffing patterns and level of education of staff). Biz office manager said really a total butt-rash and when they figured out staff time taking Medicaid - even at low TX reimbursement rate - was a better deal financially. 4K a mo on a 14K monthly private pay NH is still over 100K annually to come up with for possibly years & years. I'd run the numbers on the RM costs at 2 years & 3 years to see what $ could be there to pay what LTC insurance won't. RM seem to spiral in fees to the point that it's a loosing situation for heirs to pay off the RM to keep the house. I hope they have a good LTC that is simple to benefit from.
Also check to see if it needs to come out of the trust for RM to be done.
Stepmom has a usafruct? or something like a usufruct? We have those in Louisiana and they can be sticky if the later wife decides to just not move, the heirs just have to underwrite the costs on the property if she won't sign off differently. You see it a lot in beach & vacation houses where Dad does a usufruct for later wife but he can tell kids that "of course they will inherit the house". And she literally can have first use on it till she decides differently and they have to pay for all or settle with her financially.
Out of curiosity, how do your wives feel about Dad & his wife and your spending time & $ on them & the house? If your wife or brothers wife takes the stance of quid pro quo that if you doing this for your family that means you do it for hers too, is that an issue?
and last….do you care whether or not you get the house? if at the end of all this, there is no $ left and no reimbursement is the risk such that not an issue?
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"She has been balking on paying for things to begin with, correct?" Well, 'balking' is probably too strong a word. I think she has been under the impression Dad's been a bit frivolous with his spending, but, looking at his checkbook and charge card, I explained I don't think that's a huge problem (although they could probably cut back on landscaping costs).
"She has her own dementia and competency issues, correct?" Yes, but probably to a lesser extent than Dad.
"What would that do financially for them as they are married." She's also got LTC, for about $4k/mo, which ironically would include in-home care (that she doesn't need).
1. "Try to pin down just how much the RM would actually pay". It's about 25% of the actual value of the house, and that's after paying off the home equity loan. He could get up to about $2200 per month, or less than that and leave the remainder as a line of credit if needed.
2. Insurance-wise, we were told flood insurance was only required if we were in a flood zone (which I believe we are not). A call to the insurance agent would be appropriate...
3. "Dad will be required to pay all the required on the house from day 1 of the RM." Do you mean closing costs, fees, etc? Closing costs are estimated at ~$10K, and he does have that available.
4. We do have some documentation that would allow Stepmom to stay in the house if Dad passes first for a limited amount of time; I need to check the specifics, but there are terms spelled out in writing. Yes, he bought the house before marrying her; it's in a trust that will come to my brother and me.
5. "If dad should ever need a facility and doesn't have the $ to pay for it and applies to Medicaid, the RM usually is income for them and takes them over the asset / income limited for Medicaid." Dad's LTC will pay about $4000/mo for assisted living/nursing home.
All good questions and thoughts; both my brother and I are also talking to our respective financial planners.
- if there was any insurance payouts and there was a mortgage, the mortgage holder got all the proceeds first & foremost. Many folks found themselves with a house no longer there with no $$ at all as the $$ went in full to pay off the mortgage. And for more FUN, some mortgage holders placed a early payment penalty on doing this as the mortgage was done as a usual 30 year loan. For those older on fixed income, there was no way to afford to rebuild what they had if it was in anyway a nicer home as SBA limited to about 220K; 150K or so state grants.
My point is that if an event happens - like a fire at the home - the mortgage holder can get the funds first and then you or your parents have to finance the repairs. If repairs not done, the RM agreement is out of compliance. Someone at the point of needing a RM doesn't have the $ to do this or can qualify for funds.
- RM's were called in. We had friends who's parents were in Lakeview in NOLA which stayed flooded 8' - 14' for weeks. If there was a RM, the mortgage holder sent them a letter to the house - which of course could not be delivered initially - asking as to the conditions on the home and what the return date was. Like they insisted on a letter from Sewer & Water Board as to full functionality. yeah rite, we'll be able to do that…. Well all of this was a total crapshoot for compliance and the RM just called the notes in. They knew that there were insurance payouts happening and their goal was to capture every penny of any insurance. If it left the homeowner with zero so what. Not pretty.
The worst off were homeowners who were underwater on their mortgage and underinsured with a damaged home. They mortgage holder captured all the insurance money and they were left with partial home and still owed the final part on the mortgage. They literally found themselves still owing mortgage payment on a lot that was now requiring renovation to new much more expensive standards. If you had a home that was slabbed (house gone but slab or stairs left), it was now requiring rebuilt elevated 18' - 22' BFE. Alot of folks just had to let it be foreclosed upon as no $ to rebuild and their credit worthiness was shot. You can drive around right now on in St. Bernard parish & the MS coast counties especially and see post Katrina slabbed properties still a decade later as there just was & is not the $ to rebuild.
From one of Adam's posts:
"6. Finance-wise, we had someone come in and talk to us about a reverse mortgage, which seems viable in the circumstances. Dad is reluctant--doesn't want to 'risk' the house (although he's already got a $115K home equity loan signed out). I suspect the longterm solution is that my brother and I (who are going to pick up the monthly loan payments) will wind up funneling money to my Dad when it's needed--which, good news, means we will get to keep the house (and thus get some financial reimbursement)."
And from a subsequent post:
"As the reverse mortgage was laid out to us (and the agent in question does this on the side, not to make a living), my dad could get a monthly sum based on the value of the house, and that we'd be liable for whatever he got (not the entire loan sum) after he passed and the house was sold. Yes, we were aware the equity loan would be paid off as part of this, and yes, we understand that, in the long term, we'd essentially be giving up the house. I'm not sure what you mean by us making payments; I believe the loan is not due until a 'maturity event' occurs ,,,"
Perhaps I was too concerned, but I still do feel that RMs are like financial time bombs.
As to HELOCs, I believe the expectation was to just refinance the HELOC, but that was before the financial crisis. I do know that Chase has made some policy changes since then. At one point I was told by a Chase banker that his branch was no longer granting any more HELOCs at all.
That was during the time that the "Too big to fail" banks were sitting on their assets and not extending as many individual loans. So that position may or may not have been due to the then current economic climate and desire to retain rather than extend assets.
I'm not sure I follow your question:
"wouldn't refinance, not necessarily because of us, but could be an issue with them, with the loan being in parent's name - would they still be in a position at that point to be able to do that? - but just because they had different rules as to where they could finance to and said we were out of their lending area - sorry "
Were you referring to Adam's situation or your own? Could you be a bit more explicit? Were you told your HELOC wouldn't be refinanced because you weren't in that branch's or bank's lending area?
Adam, sorry - sometimes these posts do go off track, but sometimes the diversions can also be helpful to the original issues or to other posters.
I did want to add something to your comment about the difference between the upset values of the HELOC and the RM. You made some good points. Of particular concern is the rapid acceleration that would occur in obligations, monthly and long term.
This is my understanding:
1, The existing HELOC has an upset limit of $115K. Even if it is fully advanced, the interest is calculated on the $115K, and that's it unless it's with BofA which imposes an annual fee ($35 I believe).
Sometimes the HELOC is a balloon mortgage as well; after 10 years (or other length depending on the loan and lender), the entire balance is due and payable.
There might be some payoff fees if it's paid in full and discharged.
I'm only familiar with HELOCs through a few banks (BofA is one I would never ever deal with again!), so there may be other models and variations.
But essentially, monthly interest payments must be made; on maturity of the HELOC, what remains of the unpaid balance, interest through payoff date and perhaps a payoff charge for recording the discharge would be what's due.
That's it.
2. The RM will payoff the HELOC (there's a $115K advance right there), plus other fees as can be creatively slipped in will be added, to increase that initial principal balance....appraisal, probably various service fees which make no sense, etc.). $115K and counting....
Right at that point you're getting a principal balance that's more than the HELOC, exclusive of any additional advances.
Add the interest rate, not necessarily competitive, and calculated monthly plus recalculated if no payment is made on that interest. Already it's $115 plus fees plus interest on the first month...then more interest for the subsequent months.
As the fees creep up, the available cash for advancement creeps down. Ergo, less money for the parents to draw on when needed.
This is theoretical based on an equity RM. I'm not as familiar with lump sum RMs, and how much would be advanced and bear interest.
But the bottom line is that in the short and long runs, an RM will cost more in fees and interest and leave less for the parents and more to pay off if anyone tries to.
It grows like a notorious blob in that old science fiction movie.
Anyone planning on "inheriting" the home will be stuck paying off an amount in excess of $115K; how much will depend on the interest rate, miscellaneous fees and charges, and how long the parents live.
Segue back to Igloo's comments about needing money if the parents ever need to go to a care facility. That RM money will have been eaten up in part by fees, which are going to continue to accumulate.
There may not be enough, or even any, funds left under the RM for care facilities. And if both parents are out of the house in facilities, I believe that's justification for the RM mortgagee to call the loan, as I believe that living in the home subject to the RM is a prerequisite for good standing of the mortgage.
So, in the long, run an RM might not provide much at all for eventual care, whether it's at home or in a facility.
On another issue, assuming I understand correctly, Adam and his brother would be making the monthly HELOC payments. Adam, I assume you're aware that because this RM isn't on property that either of you own, the interest will not be tax deductible for either of you?
I'll be back later to address some of Igloo's other points and suggestions.
Adam, I'm sure it seems as though Igloo and I are complicating the situation with our comments and suggestions. I'm sure that's true, but we're really trying to point out the pitfalls so they can be seen and addressed now, not down the road when it's either too difficult or too late.
GardenArtist perhaps you could shed some ideas on how to do this??
As I re-read all this there's 2 red flags: stepmom's morphing intent & the RM.About her, that will be another post. Now about the RM, I would be cautious like very very cautious. Try to pin down just how much the RM would actually pay (usually about 45% of the value of the property and arriving at "value" could have costs to do which are added to the fees associated with the RM); find out just what the annual costs are going to be on the house as all those will have to be paid - annual costs are utilities, maintenance, taxes and insurance. Insurance may not be what dad has been paying either. New mortgage could require a whole host of increased property insurance (homeowners, mortgage insurance, flood, wind, earthquake). What often happens for property owners (not just elders either) is that we become underinsured if there is no mortgage holder insisting on required coverage, well it isn't bought. Where I live both flood & wind are required in addition to homeowners & annual costs easily run 10K (yes good readers $ 10,000.00) a yr. For those on limited income used to a single homeowners $ 800 bill from State Farm, it's a heart attack. If you can't show coverage, the mortgage can be called in
Also on the RM, so dad has a home equity loan out on the property? As others have said that will need to be paid off probably first & foremost from the RM funds. You want to find out if this is the case. If so, this could be a very expensive way to pay this off as Dad cannot get a line of credit RM but instead will have to do the lump sum RM which costs more on repayment. After the old HELOC is paid, just how much is left from the RM? Again run the numbers to see what the amount is.
Dad will be required to pay all the required on the house from day 1 of the RM. Does dad have the income to do so outside of the RM funds? Federally backed RM now require them to have qualified guaranteed income to do this in order for a federally backed RM to be done. If she has balked about paying for things, she may not easily write a check for her share of taxes, etc. - she is not going to be any easier to get along with as time goes on.
The house is owned by dad right, he married her after he already owned the house, right? Find out - like in writing from the RM and reviewed by your NAELA attorney - what happens to her if dad does a RM and then dies. She could find herself having the house sold to repay the RM as she has no ownership position in the RM. Her family could come after Dad's estate on all this and you kids for endangerment of an elder. IF her family is anything like you described her to be like, it will be a Wrath of Khan for you & your brother to deal with……
RM's have all sorts of qualifiers that have to be met for RM to continue. If Dad has to go into a facility - even for rehab - you could find he gets a letter asking for all sorts of information otherwise the loan will be called in within 30 days. If there are things that have been delayed maintenance on the house, you could find he gets a letter asking for info on repairs with contracts signed off to do otherwise the loans will be called in as the property has to be maintained to whatever standard the RM now requires. The big players in RM's (WellFargo, BoA) have all gotten out of the game as of 2012 as too many of the properties were underwater. What is left is 2nd & 3rd tier mortgage guys. Many are those who did subprime mortgages back in the heyday of those CF's - they have to slither away someplace and elderly are pigeons ripe for plucking. These guys tend to do deals that are heavy on fees and required as that's income producing. Insurance placement is a ideal on this as the insurance is just included into the RM but instead of it being an increased policy done to the old Allstate one dad had & paid for, insurance is now is a new carrier associated with the lender. The elder doesn't worry or thing about it as it;s all folded into the loan.
If dad should ever need a facility and doesn't have the $ to pay for it and applies to Medicaid, the RM usually is income for them and takes them over the asset / income limited for Medicaid.
RM's for the true elderly and frail just not a great idea in reality imho. I can totally see an RM working for a couple 63 & 66 who own a 600K home outright (so their RM could be 300K) in an area with solidly increasing property values who do it as a line of credit RM to pay for something specific (like grandkids college). Then 10 - 15 years from now they sell the home, now worth 1M. Easily repay the line of credit RM and have maybe 600K left to do a buy-in at a continuing care community or a smaller condo. But those folks can go and get a personal loan or HELOC, they don't need to get a riskier RM. RM's tend to be sold to the advanced elderly with smallish income and a home with delayed maintenance in a less than ideal neighborhood who find themselves in a panic to pay a cost of home or care.
Why can't the parents decide? I mean, they are still in their full mental capabilities, right?
What's the rush to go into an expensive AL? that will just suck all their money away.
" I suspect the longterm solution is that my brother and I (who are going to pick up the monthly loan payments)..."
Forgive my impertinence, but a reverse mortgage? You seem financially astute enough to know that these are negatively amortized mortgages. As to keeping the house, by the time the mortgage has accumulated from advances and compounded interest, you'll end up paying significantly more if you want to pay off the loan than you would if a reverse mortgage hadn't been obtained. I assume you know that the equity loan would be part of the first advance as the RM mortgagee will, as I understand procedures, insist on holding a first rather than a subordinate mortgage.
Even if you do pay monthly, unless you're making principal as well as the interest payments to keep the balance stable, the mortgage will increase monthly through the compounded interest.
Alternately, you could use that same amount of money to assist your parents, and don't even get involved with a reverse mortgage.
Another option, given that you and your brother are willing to "step up to the plate" to help your parents, is to refinance the existing equity loan for a higher amount, with you and your brother as guarantors if necessary. At least that way if you only made minimum payments for the interest, it wouldn't be compounded.
Just some thoughts to consider....
1. Just before the vacation, Dad told me he'd go into assisted living 'feet first'--and my brother's discussion with Stepmom indicated she was not ready for that change either. So, new plan--finance Dad's future and step up the home care to enable both of them to stay at the house.
2. My brother and I met with the current caregiver, 'Kate', who was recommended to Stepmom by a friend. She's great--very friendly, competent, and firm when needed. Had a good sitdown with her and Stepmom to discuss care needs, and learned that Stepmom wants to handle everything but hates handling everything. Example--Kate volunteered to iron my dad's shirts when needed, but Stepmom says she likes to do that. "Except you say it hurts your back when you iron", pointed out Kate.
3. Apparently Kate and Stepmom discussed the fact that, since Stepmom sold her house, she will split the home insurance and property tax costs with my Dad; I plan to automate the insurance payments.
4. Kate will also create meal plans for Stepmom (who no longer likes to cook or plan meals, which was new to us).
5. Ongoing issue--getting Dad to take his meds. He used to listen to Kate, but now not so much.
6. Finance-wise, we had someone come in and talk to us about a reverse mortgage, which seems viable in the circumstances. Dad is reluctant--doesn't want to 'risk' the house (although he's already got a $115K home equity loan signed out). I suspect the longterm solution is that my brother and I (who are going to pick up the monthly loan payments) will wind up funneling money to my Dad when it's needed--which, good news, means we will get to keep the house (and thus get some financial reimbursement).
So, fingers crossed for the moment...
The more likely application with the elderly is the one Pam initially suggested - where the parent needs to go to a nursing home but the Medicaid application is denied or delayed. For example, when the 5-year lookback rule an issue.
Another likely case is when the parent goes into the NH for rehab but the treatment lasts longer than 21 days. That $110/day copayment after 21 days can add up fast.
There are many ways an elderly person can run up expenses that they can't pay, for health care costs or otherwise. It makes me very, very nervous.
From WestLaw: “ As a result, on or about May 12, 2008, HCR instituted a filial support action against Appellant. Pursuant to 23 Pa.C.S.A. § 4603, entitled “Relatives' liability,” HCR sought to hold Appellant liable for the outstanding debt incurred as a result of his mother's treatment and care.
The parties submitted the case to arbitration, whereupon a three-member arbitration panel found in favor of Appellant. HCR appealed the arbitration award to the trial court. The trial court held a three-day non-jury trial, after which it entered a verdict in favor of HCR in the amount of $92,943.41. Appellant filed post-trial motions, which the trial court denied on January 13, 2011.”
In reading the transcripts, my thought is that he & his attorney did a poor job for the trial court. He did not substantial his bills; did not provide documentation; did not join his father or his sisters to share the support-burden (if he had, his share would have been 23K). He did not show an attempt at completing Medicaid application or pursuing auto accident litigation. HCR just had to show the trial court he had income and bills due. If the Pittas & his attorney’s thought was that he did not have to do anything because he won in arbitration, that was a huge costly mistake.
NH bills for elderly parents are not going to be what Pittas was. There is going to be Medicare or other health insurance. If their admitted to NH rehab, Medicare is going to pay for 100% of first 21 days and possibly up to 100 days @ 80%. If rehab is due to accident, someone is gonna get sued & followed up to pay. If they need NH after rehab days over, family will complete the Medicaid application. And Momma is not going to leave rehab AMA & move to Greece!
The situation posed for Pittas is very very unique.
BTW HCR was taken private in 2007 with The Carlyle Group ($ 185B in assets under management in 2013) as the majority owner.