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Should my mom consider a reverse mortgage?

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  • Should my mom consider a reverse mortgage?

    I honestly have not done any research on this yet, so forgive me for another beginner question, but what are your thoughts on my mom's situation:

    She is turning 66 soon, now works part-time and hopes to wind things down soon.  She has minimal savings (essentially an emergency fund).  She will have SS, a small pension, I think a small annuity and maybe will continue to work a tiny bit.  Her biggest asset is equity in her house:  home is now low 900's, balance 238k (22 yrs left on a 30 year term at 5%) - don't ask, that's a disaster, she is just very lucky that the house appreciated a LOT because of the area.  Her monthly payment is $2150.  Bottom line:  I want her to enjoy the remainder of her life, travel while she is still in good health and all that, and with her current cash flow she is comfortable, but could use some extra money for fun.  (I am saving aggressively enough for my retirement and will be fine, so want her to enjoy herself and yet would rather avoid gifting her money and want to see if using equity in her house can be wise in any way. Ideally I would have just paid off her mortgage, but I don't have that kind of cash.)

    Do you think it is reasonable for her to do a reverse mortgage to create extra cash flow?

    I've used this calculator: http://www.reversemortgage.org/About/Reverse-Mortgage-Calculator and I am not sure how to interpret the numbers it spits out.  Basically is there a way for her to essentially stop paying the mortgage completely given her significant equity in the house?

    Any other thoughts would be appreciated as well!

  • #2
    I guess what I am trying to figure out is whether all this can accomplish is for her to get a lump sum of say 80k (or whatever those calculator show), OR is there a way to actually stop making mortgage payments, receive a monthly paycheck and live out that principal?  (I believe this is not wise mathematically, even if possible, but I want to present mom with some options and also know what she can do if at some point she actually HAS to.)

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    • #3
      https://www.whitecoatinvestor.com/reverse-mortgages-has-anything-changed/

      https://www.whitecoatinvestor.com/10-things-i-thought-i-knew-about-reverse-mortgages/

      https://www.whitecoatinvestor.com/the-problems-with-reverse-mortgages/

      Hope that helps. Be sure to read the comments. It was a pretty good discussion. We spent all week on it.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #4
        Thanks WCI!  I probably should have started by searching through the site!   This will be my reading for tomorrow...

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        • #5
          She's 66.  I don't know her health, but I'd presume she's still pretty young.

          What sort of income does SS, pension, annuity throw off?  Seems like that should be enough, even with a house payment.

          Can she refinance the house to a better rate?

          Seems short-sighted to reverse mortgage her only asset at such a young age, to create what will essentially be spending money to blow.  Eventually the interest will outpace the appreciation of the home.  Alternatively, that house could be a great asset 20 or 30 years from now when she needs the money for something more important.

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          • #6
            Because your mom was born between 1943 and 1954, her Social Security full retirement age (FRA) is 66.  If your mom is physically able, she should continue to work (even part time) until age 70.

            For each year over full retirement age, you get a non-compounding 8% deferred retirement credit.  That means that your mom will get a social security benefit at age 70 that's 32% larger than what she'd get at age 66.  This likely is the single biggest thing she can do to increase her income in retirement and to minimize the risks of inflation and longevity.  (Deferred retirement credits only build up to age 70.)

            Your mom should try living off of what she would make from social security at age 66 and investing the rest in a Roth IRA.  If mom can't get by on what social security would pay her, then she knows she needs to keep working.

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            • #7
              As you stated most of her monetary worth is in her home. The question is how to use this for retirement. One option would be a reverse mortgage and it may be a useful tool for her but it is hard to say for sure (WCI's articles were very interesting).

              Rex mentioned another option; selling the house and buying a less expensive home. Obviously there are major downsides with selling a house including the hassle of selling, buying, and moving. The upside would be getting rid of mortgage payments and maybe getting some cash that could be used for other retirement tools.  Could she move to an area where homes are less valuable? How much house does she need? During retirement priorities of location and home size / amenities may (or may not) change and moving to a lower cost area may improve retired quality of life (on the other hand, moving may worsen quality of life). It is certainly something to consider.

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