Q: My wife and her sister were given their mother's home when she passed away. The property was mortgage-free. For the past six years, her sister has been living in the house.
Over the years, we have helped her out with paying half of the taxes and just a little amount of improvements over the years. We all are in our mid-60s. My wife's sister is retired, and we are about to retire. We've agreed that she can stay in the home until she passes away. But that isn't going to help us when it comes to paying expenses of the property.
Is there any way the sisters could do a reverse mortgage or get money out of the equity in the home? Since the sister living in the home can't afford to make the payments, anything we get from the home would help offset the amount of money we will be paying once we retire.
A: We admire that you are going to such lengths to help out your sister-in-law. While going through a reverse mortgage may be right for you (we'll get back to that in a moment), we'd like to suggest you first find a good mortgage lender or mortgage broker to talk to about the situation. You need some knowledge to inform your decision-making process, including the approximate value of the home your sister-in-law is living in as well as your own home's value.
Even though your sister-in-law is retired, one option might be to take out a regular 30-year mortgage on that home in the form of a cash-out refinance. You may also be able to do a cash-out refinance on your own home. You might be able to get a home equity loan or a reverse mortgage on your home or the home your sister-in-law is living in.
There are a number of choices here for you, and we can't be sure what is or what will be right for you, but a good mortgage broker or mortgage lender might be able to give you some options and explain how those options might unfold in the future.
A few things you should know about reverse mortgages: The first is that the owner of the home must be 62 years or older. The second is that the home must have no existing loans or a loan with a low balance. The next thing you need to know is that reverse loans can be expensive to take out.
For homes that are valued at $125,000 or less, a reverse mortgage fee is limited to $2,500. For homes above that amount, the fee increases along with the home's value, but tops out at $6,000. But that's only part of the story, because the interest rate attached to your reverse mortgage is higher than a standard mortgage, and different reverse mortgage lenders charge different interest rates. You can read more about reverse mortgages on the Consumer Financial Protection Bureau's website, https://www.consumerfinance.gov/ask-cfpb/what-are-the-costs-i-will-have-to-pay-for-a-reverse-mortgage-en-237.
Conventional loans are generally less expensive and carry lower interest rates. Granted, the reverse loan will give you money on a monthly basis for years to come and the conventional loan will fund all the money when you take out the loan. For some people, the reverse loan gives some certainty that money will be coming into the household for expenses, while the conventional loan gives you the money and you have to set aside money from those funds to pay the loan back in the future.
A third type of loan you should consider is a home equity line of credit that would allow you to draw money from the home from time to time to pay expenses and would allow you to accrue interest only on the cash you borrow. But this loan will also require you to make monthly repayments to the lender.
That's why we recommend you sit down with a couple of different lenders that can walk you through your choices. There may also be other options available to you outside of these options. It's hard to say. There are quite a number of variables to your situation, including how much money you'll receive from Social Security, how much your sister-in-law will receive from Social Security and any pensions she is entitled to, how much you each have in savings or investments, and whether any of you decide to take a part-time job now or in the future.
The money you need for retirement will need to be balanced with the amount of money coming in from all these sources. As you add up the amount of money you need for your monthly expenses plus the amount you'll spend to help your sister-in-law and then compare that to the amount of money you take in, you can make a smarter decision about which option to select.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)