Dear Rick:
I’m in a situation that I hope you can help me with. My mother is 80 years old and still very sharp but also very stubborn. Her overall health is not good, and her doctor has told her that she only has a few years left. My mother lives by herself in the same house she’s lived in for over 50 years. I would like to move her into an assisted living facility, but she absolutely refuses. She wants to stay in her home. In fact, she recently did some home improvements in her home, such as adding grab bars and a sit-down tub. Because my mother does not have much in savings, she recently talked to a reverse mortgage company to mortgage her house, to use the money for if and when she needs assistance. I am an only child and I don’t care about any inheritance, I just want to do what’s right for my mom. My first question is, in general, do you recommend reverse mortgages, and if you do, do you think that using a reverse mortgage in my mom’s situation would be appropriate?

Thank you.

B.T.

Dear B.T.:
First, I’m sorry to hear about your mom’s health situation and I wish her the best. However, one thing that you can be thankful for is that your mom is still sharp and is capable at this point of making decisions on her own.

With regard to reverse mortgages, I believe they are a tool that can help many senior citizens. The key for a reverse mortgage is to make sure that the money is going to be used for an appropriate purpose. As far as I’m concerned, how the money will be used is the most important issue when it comes to reverse mortgages.

First, for those of you who don’t know what a reverse mortgage is, it is a type of mortgage that allows someone to access the equity in their house without having to sell the home, or without the responsibility to make monthly payments. In a traditional mortgage, the homeowner is required to make payments every month of principal and interest. In a reverse mortgage, no payments are required. In fact, the mortgage doesn’t have to be repaid until either the property is sold, or upon the death of the homeowner. At the time of death, the beneficiaries have the option to either pay off the mortgage, or to sell the home and use the proceeds to discharge the mortgage. If the house is worth less than the outstanding balance on the mortgage, the beneficiaries have no liabilities; rather, the loss is on the mortgage company. Therefore, a reverse mortgage allows seniors to stay in their house for as long as they choose, and at the same time, to have access to cash to use for their needs.

In the situation at hand, I believe a reverse mortgage would be appropriate. Your mother wants to stay in her home for the rest of her life, and she is using the proceeds of the reverse mortgage to increase the quality of her life by hiring aids to assist her. I believe this is one of the best ways to uses a reverse mortgage because it increases the quality of her life by allowing her to stay in the home. On the other hand, seniors who use a reverse mortgage for investment purposes or to loan money to family and friends is something that I generally do not recommend. I believe if someone is going to get a reverse mortgage, the proceeds should be used for their care and comfort, not others.

Even though your mother is sharp at this point in time and can handle her own affairs, that may not be the case in the not so distant future. Therefore, what I would recommend is that you obtain medical and durable powers of attorney for your mom. These powers of attorney will allow you to make health decisions for her if she is unable to do so and also allow you to handle her financial affairs if she is no longer able to. I cannot stress enough how important these documents are in times of a family emergency.

On the whole, I have no problem with reverse mortgages, and it’s something that many seniors should explore if they have cash flow issues and want to stay in their home long term. The key, as far as I’m concerned when it comes to reverse mortgages is once again, what are you going to do with the money.

I’ve been asked many times by seniors if they should do a reverse mortgage to use the money to pay for a grandchild’s college education or to fund a child’s new home. In the great majority of situations, I tell seniors that I don’t recommend a reverse mortgage for that purpose. The reason is quite simple, and that is the seniors are putting their financial future at risk, and that is something that I do not recommend.

For those of you who are thinking about a reverse mortgage, take your time and read up about them. In addition, make sure that you understand all the fees and costs involved, and that you deal with a reputable company.

Good luck!

Rick is a fee-only financial advisor.  If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.
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