Washington DC/Baltimore

[penni_n_me]

I was wondering if I could get some advice/help on a situation that I am facing. My pre-retirement age parents want to move to the Vienna area (one of them just switched positions). Currently they own a home which has no mortgage on it, so essentially they are debt free. However, they have about only about 50-60K that they can put towards the down payment and wish to purchase a 600K townhome. I'm betting that they only plan to work for about 5 more years. I've attempted to explain to them that purchasing a home at their age is not the best financially sound idea and perhaps since they don't plan on working for that much longer that they should rent instead. However, they are very opposed to renting (I don't know why).

I've explained that what they have right now, they won't be able to pay off a 10% down + closing costs, but they countered that with the fact that they purchased their first home doing 5% down and then quickly made up to the difference (to be as if they put down 10% down, I think; my real estate knowledge is pretty fuzzy).  Furthermore, they don't make enough, combined, to pay off the house in 5 years. However, they believe that the housing market will rebound in 2-3 years (which it might) and allow them to at least break even when they want to sell the house within 5 years of purchasing it.

I am opposed to them wanting to buy a house because I believe that it'll put them into financial instability. Does anyone have any suggestions as to what I can do? If anyone has any suggestions to the counter point (i.e. being able to make their wishes come true), please also let me know. I would greatly appreciate any help or suggestions, or any financial advisors that I can consult, or any websites that will spell out how much each situation will cost. 

The selfish caveat to this is that if they can't pay off the house or make the mortgage, I'm expected to chip in. I would, but I am a student with limited cash flow that's currently paying off my own mortgage and am worried as to how I can provide for them.

Much thanks!

[kitty12]

You didn't mention a sale of the home they currently own.  Do they plan on keeping it and renting it out for extra income?

[philip-gvinter]

Kitty12 makes an excellent point. What are your parents' plans for their current home? How much would it rent for and what portion of their new mortgage would it cover? What is the approximate value of the home and how much of the purchase price of their new home could a sale pay for? In order to be able to sell the home and break even the home would need to appreciate by about 10% over the course of 5 years or at a compounding rate of about 1.6% per year which is not an astronomical or rapid rate of appreciation but which is also something which is far from guaranteed. My advice would be to sit down with them and analyze all of these factors which can help the see the numbers involved and can help identify which assumptions are necessary for the purchase to be a success and what the consequences would be if it did not work out.

[RonSchwartz]

Hi Penni_n_Me,

If your parents are considering staying in the would-be new home for a long period of time and they are of retirement age (>62 Years Specifically) there's a possibility that they could purchase the new home with a combination of equity from the current home and a Reverse Mortgage.

Widely misunderstood, a Reverse Mortgage is a way that they could purchase the new home without having to qualify to make payments on it.  In your case they would, however, need to put far more than 5% down and my read is that the source of the additional down payment would be equity that that they would cash-out of the current home. 

They would then move out of that property and rent it to cover the note on it.  The Proceeds from the cash-out would be used to make the down payment potentially even cover the closing costs of the new acquisition.

Their income would need to qualify them for the cash-out refi on the property they are leaving.  There is no income qualification for the Reverse Mortgage presently but they may soon need to be able to prove that their income can cover their obligations on the old home and the taxes and insurance costs on the proposed new home.

The new home would have a Reverse Mortgage on it.  They would not be required to make a Mortgage payment on the new home. It’s important to know that they would, however, owe more on that note as each month passes because a Reverse Mortgage is a negatively-amortizing loan.  That means the loan balance would grow each month in place of their having to make a payment.  

At the end of their time in the new home (by their choice or after their passing) the loan balance would need to be paid by either refinancing the home into the name of their Heirs (i.e. you) or by the sale of the home. At no time would they be granting title to the home to the lender. 

The most common myth about Reverse Mortgages is the last statement.  At no time would the borrowers grant title to the home to the lender.  There would, however be a note against the property with an ever-increasing balance.  If the balance exceeded the value of the home they (or their estate) would only be responsible to pay the lender off with whatever proceeds the sale of the property would yield.  If the sale price of the home exceeded the loan balance then those proceeds belong to the borrowers (or their estate).

OK...that's a short class on Reverses...more at www.NRMLA.org  and HUD offers: http://www.hud.gov/buying/rvrsmort.cfm

Ron

[philip-gvinter]

Thanks for the information and creative suggestion Ron!

[lisagreaves]

Ah, parents.

So, your parents aren't going to sell their current home - who will be living there?  Will it be vacant?  Will they rent it out? Are they prepared to be landlords? Will the rent cover their new mortgage?  I really don't get what they plan to do with their current house.

As far as living in a house for five years and then selling it:  Ask them if they have a plan for what happens in five years and they haven't built much equity?  Can you dig out the copy of your HUD-1 settlement sheet from when you bought?  Look at all the fees the sellers had to pay - it costs a lot of money to sell a house.  Sales commission, closing costs, taxes all add up.  You can take those numbers and help them figure out how much the market will have to grow in five years for them to break even.  

If they retire in five years and can't make the mortgage, will they then sell the current house? 

[jimi]

You should also have them talk to their accountant.

If they convert their home to investment property, they lose certain (and significant) tax benefits related to the sale of their PRIMARY RESIDENCE.  Capital gains on the sale of their home is exempt from taxes (their are limits - both time and dollars).  Have them look up Section 121 of the Internal Revenue Code.