Q: My parents are in their early 70s and retired. They own a modest home and they rarely travel, eat out, or buy expensive items. Yet their monthly expenses exceed the income they receive from pensions and Social Security. They have good health insurance but pay quite a bit out of pocket for medications. They've depleted their savings and 401(k)s and now use credit cards to offset their income deficit. I have bailed them out of credit card debt twice. They are constantly worried about the rising cost of living and the possibility of losing their insurance. My parents have worked very hard all their lives—raising seven children and helping raise a grandchild—and I hate to see them in this position. I am exploring a reverse mortgage for them. What is your opinion?
A: It's obvious your heart is in the right place, but before we turn to your parents' finances, let's talk about yours. You will only make things worse if bailing them out increases your debt or jeopardizes your saving and investing strategy. The last thing you want is to have to rely on your kids a few decades from now.
That said, reverse mortgages are a viable option for retirees who need more income. Once you are 62 years old, you can borrow against the value of your home; you can get a lump sum, monthly payments, or payments at times and in amounts of your choosing. The borrowed money comes out of the equity in the home. If your parents sell or move, they'll need to repay the lender, with interest; when they die, their heirs must pay off the loan. The good news is that you can never owe more than the value of the home, but if the lender takes all the proceeds from the eventual sale, that wipes out any inheritance you may have received (learn more at AARP.org/revmort ).
Given what you've told me, I'm not sure a reverse mortgage is the best move for your parents. They still need to keep up with property taxes, utilities, and maintenance; it makes no sense to take out a reverse mortgage if they can't handle the ongoing costs, and the fact that they've run up credit card debt makes me think that they can't. You need to determine whether the monthly payout from a reverse mortgage would cover their expenses.
The other issue with a reverse mortgage is the hefty up-front fees, which can easily be 5 percent or more of the loan amount. Perhaps it makes more sense for your parents to move into a low-maintenance condo. Or maybe we can put that big family of yours to great use: Rather than shouldering the entire cost yourself, what if each sibling contributed $50 a month to a fund that would help your parents pay the bills? That's $350 a month. Or figure out what each of you can comfortably afford to contribute and then see how that money can be best used to help your parents live the stress-free retirement they deserve.
Suze Orman's most recent book is her 2009 Action Plan: Keeping Your Money Safe & Sound (Spiegel & Grau).