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My MIL is 70yo and has zero savings for retirement. She is widowed and receives social security. She owns her home, approx $400k net worth. She has 1 son. We want her to use the equity in her home to support herself and think the best way would be a RM. I'm just not sure about the fees, how RMs work or if there is a better option. We can help her with taxes and insurance if/when needed.

I've read several posts about RM but usually there is still money owed on the home. The other thought was open a HELOC and she can withdraw if/when its needed, but then she will have a payment. If she does get a RM would it wise to put some of the money into a ROTH IRA? Maybe it gains a nice little return, but I know that's not guaranteed..... We don't need the inheritance and want her to have the money now to hopefully enjoy life a little instead of worry. Any tips or suggestions would be greatly appreciated.

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  • Note: I edited your question to remove the ask for recommendations on companies, as we don't allow those on this site. Commented Feb 25 at 19:22
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    Money contributed to an IRA, whether Traditional or Roth, must come from compensation (that is, earnings from the sweat of one's brow such as salary or wages, commissions from sales, etc). Proceeds from a reverse mortgage or any loan etc are not compensation and cannot be used to contribute to an IRA. Commented Feb 25 at 20:42
  • @DilipSarwate+ alimony from a pre/non-TCJA divorce also counts -- but wouldn't apply to a widow Commented 2 days ago

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Welcome new member!

If she does get a RM would it wise to put some of the money into a ROTH IRA?

No. Firstly, you can only fund an IRA if you have earned income. Borrowed money and social security do not count. Secondly, she's 70 - she does not need to save for retirement, and there's not enough time to benefit from the tax savings on growth. Plus it is generally not wise to "borrow money" against your home to put it in an investment account, especially one designed for retirement.

A reverse mortgage is essentially borrowing money against your house slowly over time. Yes you don't "make a payment", because instead of paying the interest monthly it is pulled out of you home equity (meaning you get less back when you sell the house).

You could do the same with a HELOC by just borrowing enough to cover the expenses you need plus a little more to cover the minimum payment. It's a manual step that she may not like, but it's more transparent that "hiding" the interest costs in the RM. OR she could take out a full equity loan to get a lump sum, which would have higher interest costs but would be easier to manage since you only have to "borrow" once.

A more drastic (but cheaper) option would be to downsize and cash out some of the equity to use for expenses, but I completely understand that this is not a simple answer emotionally.

HOWEVER, this is all dealing with the symptom, not the problem. The problem is she has more expenses that she has income, and presumably has no savings (just her home equity) to cover those expenses. I would also look at expenses to see if there's anything that she could cut, or if the heirs could cover more expenses themselves rather that adding debt to cover them.

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  • Would another way to think of a RM as you selling the house, but the buyer pays you over time rather than as a lump sum? Commented Feb 25 at 16:15
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    Not really since you still own the house, but you continually borrow money against it as they pay you, and the interest gets accrued to the balance rather than you making payments. Commented Feb 25 at 16:38
  • Right. Normally buying over time is a service to the buyer (they can't afford the lump payment), and they pay interest for this service. RM is the opposite, because the "seller" wants to maintain their residence in the home. Commented Feb 25 at 16:38
  • As I've noted elsewhere, if mortgage rates are low enough, and your time horizon is long enough, borrowing money when buying a house rather than paying from savings can be a relatively safe form of leveraged investment. As the time horizon shortens, the risk increases. Unless the effective cost of the reverse mortgage is very low, taking more than is needed in order to invest is probably not a great idea at this point. (Even ignoring current state of the world.) One does want to try to get returns on middle - duration savings that will outpace inflation, but CDs etc. may suffice for that. Commented Feb 25 at 16:43
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    As someone mentioned in a comment, even if it were advisable to fund an IRA at her age, she wouldn't be able to do it -- you can only fund IRAs from wages, not investment income or loans. Commented Feb 25 at 23:27
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You say

We want her to use the equity in her home to support herself and think the best way would be a RM

but then you immediately continue with:

I'm just not sure about the fees, how RMs work or if there is a better option.

So why would you think that? You don't explain what lead you to that conclusion, especially given your admittedly zero knowledge about how RMs actually work or how much they cost.

The first thing I'd suggest is budgeting. Understanding where and why the money disappears. If she's living beyond her means - is the means the problem, or the living? Can she cut expenses? Can she reduce costs?

Once you're done with budgeting, the next step is the balancing. You know the expenses, you know the income, you know the difference. You need to cover the difference. How much is it? If it's a lot, maybe go back to the first step and see how else she can reduce costs. Move in with some of the kids maybe? Move to a lower COL area? If it's not a lot - consider how to cover that difference. Help from the children? HELOC? Second mortgage? Reverse mortgage? Each has pros and cons.

Generally, when it comes to the various ways to extract equity from real estate, reverse mortgages would be the more expensive way. The reverse mortgage companies assume the senior person utilizing their services doesn't understand, doesn't know, or doesn't care about their fees and tuck in a lot of fees and costs into the mortgage. A regular HELOC, if available, would be by far a more efficient way to extract equity.

In any case, there's a considerable risk of exhausting the equity credit limit before passing so I'd strongly advise to consider other options first and resort to equity loans (of any kind) as the last resort. You don't want her to end up not only with expenses exceeding the income, but also homeless.

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    I think you are answering a different question that OP ask. The mother in law is in retirement and has $400k in savings that happen to be in the form of her house. The goal is to use these savings slowly over the next 25 years or so to grant her a higher standard of living that her current income gives her. Telling her to budget and spent less is completely missing the point on what OP wants to do. Commented 2 days ago
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    That's your understanding of the question, it's not mine. Commented 2 days ago
  • I second @quarague. This answer feels belittling: There is no indication that the OP or their mother in law are not aware of the income/expenses balance. On the contrary, they are in the process of working it out, and part of that process is to turn the house equity into liquid assets, details of which is what this question is about. You may suspect that the underlying problem is not the one the OP is asking about, but that should at best be a careful, polite side remark. Commented 2 days ago
  • @Peter-ReinstateMonica they're asking about taking out an equity loan to put the money in IRA. Are we reading the same question? Commented 2 days ago
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    From OPs question: "We want her to use the equity in her home to support herself" and later on "We don't need the inheritance and want her to have the money now to hopefully enjoy life a little instead of worry" Seems pretty obvious to me. Commented 2 days ago

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