More fun, let's figure rental value
by James Denison - 2/5/13 5:54 AM
In Reply to: 55-60% Value by James Denison
The parents starting buying the home 45 years before the last one died. What if instead they had rented all those years, the same house? Rental value is usually less than mortgage cost at any same given time. So, let's assign some rental values over those years. To make it easy we'll say the rent went up $50 per month every 5 years, starting at $700 per month. We'll also assume those last 15 years the rent would have been constant, so this matches the figures used in previous post, perhaps due to stagnated rental market. Here's the chart.
year to months rent cost
5 60 700 42,000
10 60 750 45,000
15 60 800 48,000
20 60 850 51,000
25 60 900 54,000
30 60 950 57,000
35 60 1000 60,000
40 60 1000 60,000
45 60 1000 60,000
Total Rental Value = $477,000
So you take that total rental value of the property, add to it the amount they received from the reverse mortgage, and you get $577,000. Compare that to the total cost $431,676 of their original mortgage across 30 years, and they came out ahead by $145,324 computed that way. If the property is still worth $200,000, then their heirs can still collect about $40,000 after expenses in paying off the reverse mortgage and selling the property, which puts a final gain figure of $185,000 for the family ahead of what was paid out originally.
So, can a reverse mortgage be a good thing?
The alternative is the parents may live at a sub standard level, which could affect their health during that time too, but at least when they die the inheritors can sell the house and have all that gain for themselves, gain they themselves didn't earn. Furthermore, in some states there would be added inheritance taxes to deal with. A final dagger in the heart of inheritors would be to discover medical costs the govt may have paid are to be reclaimed under the Estate Recovery Act and they end up with little to nothing anyway.
So, why not have the parents take out the equity, use it for their betterment in their retirement years, and leave less for the Estate Recovery Act if they end up on medicare?
It may not be for everyone, especially not for those who can afford to live out their retirement years comfortably without the reverse mortgage and can leave the home debt free and not subject to the fed's Estate Recovery Act. For some however, it's not stupid, but can be a wise move.
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