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CL says

1) Are they a bad idea in general?

In general yes they are for most

2) I have a decent amount of cash, and could do a sale/lease back instead. Is that a better option?

Absolutely

CL says

1) Are they a bad idea in general?

No, they are not a bad product. They serve a useful purpose of keeping the elderly independent and in their homes.

CL says

2) I have a decent amount of cash, and could do a sale/lease back instead. Is that a better option?

As long as any tax implications don't hurt.

CL says

They have plenty of cash flow, so I can't imagine the extra costs are worth it.

If they don't need the cash flow why do anything different?

Strategist says

If they don't need the cash flow why do anything different?

That's one of my questions for them, and their financial advisor.

Since it's a loan, really, and compounds, isn't it likely that the elderly would wind up giving up a huge chunk of their equity in interest?

Also, the bank that is offering it (BOE), says they are paying "100% of the closing costs", but that sounds specious to me. I assume they are getting their payout somehow, including probably by a lower appraisal.

Thanks gang.

Ironman says

If they have cash flow, why are they considering a reverse mortgage?? They're usually for people who NEED cash.

Also, if they have cash flow, why won't they consider a home equity line of credit instead, where they can just pull what they need?

Good question(s). I'm going to ask them all that now, the advisor, bankster and my folks.

Thanks man. I assume reverse mortgages are usually paid in installments or a lump sum. It would seem that compounding interest would make either of these less than good, as you could easily double the amount you benefit from in less than 20 years, right?

Is that one reason to do an equity line of credit, since you would only owe interest on what you actually took out?

Update: I talked to a smart fella I know (who only communicated in passing). He mentioned a good idea might be a wrap mortgage, with interest only. There was also talk about creating a Trust (or maybe even an LLP, I don't recall.

I am trying to figure out what he meant. Can someone give it the old college try?

Would it be that the folks keep the property in their name (and thus refinance), and I get a loan to wrap around theirs?
Would I get a mortgage on the property, and then create a personal IO loan to them (and still get the property later as inheritance)?
Where would the Trust fit it?

Any basic walkthrough would help a ton.

Thanks gang!

When something doesn't make sense; as in why your financially secure parents seem to want to get themselves into a horrible reverse mortgage, you probably want to question your assumptions about them and their finances. Perhaps they aren't doing as well as you thought, perhaps due to bad decisions they're embarrassed to describe. Maybe there was a bad investment. Maybe they actually need the money.

My own parents recently divulged that their situation was far from good despite years of them talking about their cash flow and how things were fine. And they had to be forced into that by an unexpected situation.

Best case scenario: they've been convinced by a friend that they need to maintain a more lavish lifestyle and are securing the cash flow to do so.

Leverage has to assume one thing, that the future is set. As long as that's true, and you never encounter any disasters, you are fine living beyond your means(i.e. reverse mortgage). But if any unfortunate circumstance should befall you unforeseen, who and what you owe can change everything.

Thanks @Quigley !

That is a perfectly reasonable question, and I now realize I have more information that I've gained since I first posted. Their income is fairly high (into the 6 figures) and they have 6 income streams as of now. The financial advisor (a conservative in general), is more concerned that they will have a drop in income when they stop working (then they'd be down to 4 income streams). They have an IRA, pension plans, 2 SSA checks. They aren't loaded per se, but I can see his concern. The mortgage they have is adjusting too, so that's why they were pushing the reverse idea. They're both in good shape, exercise daily, eat well, etc. They have some longevity in their genes too

The revereses don't seem inherently terrible, other than they are a loan and they compound, and have high fees. The bank is waiving most fees, but they'd still need to pay upfront for the FHA insurance.

I suppose the downside of me simply paying cash for their balance (maybe 200k), is that my money could be growing faster in a balanced market investment. I am heavily in the market now, so it would offer me some diversification. If I were to do the wrap around, I'd be able to let me money grow, and use the bank's dough to finance the mortgage (and I guess make a point or 3 off the IO loan I'd give to them?).

Maybe the idea would be that I'll inherit the house anyway at some point, so it'd be easier to let it pass through as inheritance. Could I write off the debt when they do move on (to the great beyond or whatever)?

Thanks again!

CL says

My dad bikes 25 miles a day and does a whole bunch of (paid and unpaid) homeless outreach programs. They're pretty together overall (Mom's a professor, so can work for quite a while into their golden years).

Does not look like your parents need any help with their finances.

Great points. I almost forgot to tell you: the bank is saying the best they can likely do is wipe the mortgage. They would not receive any cash or monthly check.

In easy math, it would seem I could buy a 400k house (today) for 200k, in a neighborhood that seems wealthy and resilient. Let my folks live in peace and comfort, and know the property would be well cared for.

My other questions were primarily about the best way to capitalize on it. Not necessary but would be nice to not leave money on the table.

Of course, any of my assumptions might be wrong. Or maybe transfers within families might have better options than with strangers.

Thanks gang.

CL says

the bank that is offering it (BOE), says they are paying "100% of the closing costs"

will loans, all front-end free stuff can be recouped via marginally higher interest rates.

A RM is great for them - free money! -- shitty for you!

it's only a win if Medicaid clawback on nursing home expenses would take the home equity in the end anyway.

Bellingham Bill says

t's only a win if Medicaid clawback on nursing home expenses would take the home equity in the end anyway.

You mean, the reverse is only a win if the clawback were to occur, right? In essence, spend it down while you're in it because someone's going to take it anyway.

But in my idea-plan that wouldn't be an issue (assuming they didn't need Medicaid in the next 5 years or whatever the lookback is), right?

Thanks!