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law offices of merwyn j. miller
191 calle Magdalena, suite 270 • encinitas, San Diego County, ca  92024 • 760-436-8832

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HELPING AN ELDER BUDGET (AKA PREVENTING RIP OFFS)...

Introduction
Reverse Mortgage Explained
Check the Income & Expenses
Ignoring the Charge Card Statement
Conclusion


Dear Mr. Miller:

Introduction: My Mom recently came to me to discuss her finances. Basically, she needs more money and wants to get a reverse mortgage on her house. When I asked her how much more she needed, she said she was withdrawing from savings about $300 per month.

I am very disturbed by all of this. I thought she was doing fine, now all of a sudden I find that she is not. I don’t want her having to eat cat food! Is this a good idea? Are there other options?

Worried Daughter

Dear Worried:

Reverse Mortgage Explained: The easy answer is that Life is Options. There are always many choices. Reverse Mortgages are certainly one. For those of our uninitiated readers, a reverse mortgage is simply a loan from a bank which does not need to be repaid until the senior (generally defined as one over 62) moves out, sells, or passes on. It is a great method to tap into the equity in one’s house in order to make ends meet. This loan can be a monthly distribution to the senior or a line of credit that can be drawn on when needed. But, as with all loans, nothing is free. There are generally some serious costs attached to these loans. A quick look at the Bankrate.com website article on this issue indicates a 2% or higher origination fee along with the other typical loan costs one might encounter. For a $300,000 loan that is $6000 plus maybe another $1000 in ancillary costs. And, since monthly payments are not being made, interest (and the loan balance rises). Further, there is typically a mortgage insurance premium that is also tacked onto the loan balance. To me, that means that reverse mortgages are, maybe not the last choice, but certainly not the first one. (back to top)

Check the Income & Expenses: So what about other options. Probably the first choice should be to delve into your Mom’s income and expenses. Make a column of all of her monthly income sources and amounts from each source. Social security will be one, perhaps a pension, bank interest, securities account income, etc. Then make a list of all of the expenses. A great way to do this is to go through your Mom’s check book for the last 3 months. See to whom she has written checks or made online payments and work with her to determine for what products and services these payments were made. Your goal is to determine if she really does need more money or if something is wrong somewhere. And don’t worry about invading your Mom’s privacy, remember, she opened the door and wants your help.

My wife and I actually had this exact situation with my mother-in-law. My wife went through her Mom’s check book register (she didn’t have an online account) and created an average monthly expense schedule. One line item was for Mastercard. It was about the same each month and we weren’t too worried about it because she really didn’t use her card that much. (back to top)

Ignoring the Charge Card Statement: Ignoring the charge card statement was a big mistake. A few years later, after she passed, we discovered some very disturbing items on it. The first was a payment to a charity. It was a fine charity to whom anyone would feel good about giving. Only problem was, someone who is financially having a hard time making ends meet for herself shouldn’t be giving to charity. I have no idea how many years this particular item had been paid. I suspect maybe 10 years or longer at about $50 per month.

The second item was even worse. Two years earlier, she had purchased a 2 year old car. As with many cars, this one had a 4 year manufacturer’s warranty on it. My wife had gone to the car dealer to help her negotiate and purchase the vehicle. As is typical, the salesman had offered her an extended warranty to kick in after the manufacturer’s warranty had ended. She, or my wife, declined (in my mind correctly). Well, guess what we saw on the charge card statement when we finally examined it. A payment to the warranty company for the extended warranty. Apparently, a short time after the purchase of the car, someone had called my mother-in-law and offered (perhaps talked her into) an extended warranty. It was something like $150 per month and upon calling the company we discovered that the last of the 24 payments had just been made. By the way, about a year before she died, she could no longer drive and sold the car--the manufacturer’s warranty was still in effect at that time.

Between the charity and the extended warranty, she would have increased her income by $200 per month. With that and the other adjustments we made, that would have improved her situation by about $300–the exact number that would have prevented the problem from ever occurring. (back to top)

Conclusion: Moral of the story: when you go through the expenses go through ALL of the expenses including three months worth of charge card statements. Only then will you see the complete picture and only then can you make a decision as to whether a simple adjustment on the expenses can solve the problem or whether something more extensive is necessary. Other options might include changing the investment strategy (are C/Ds and savings accounts really the right way to go), annuities, or a reverse mortgage. (back to top)
 

   
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