Assume the mortgage or...

So my mother-in-law has gotten herself in a sticky situation we’re looking for the best thing to do. She can no longer afford to pay her mortgage. She has a house built in '02 (prefab construction) by a lake in a resort area of Maine. They bought it for $250k cash. Since then her husband passed and she took out some equity. Her equity loan has a balance of 138k and the payment is $800/month.

The idea is for her to sign the house over to my wife and I, and my wife’s brother. We would share the mortgage cost then when my MIL passes we would have this house to rent, sell, or use as a vacation home. My idea is to keep her current mortgage and just make the payments.

Any other ideas for this situation? I don’t like the idea of having $400 out of pocket every month, but it won’t break us.



I’m not a tax expert but believe if she deeds the house to you now you will be assuming not only her mortgage but also her cost basis in the house, say $250k. In the future should you decide to sell the property any gain will be calculated using this cost basis. If on the other hand you simply loan her money to pay her mortgage, perhaps even secured by a 2nd mortgage on the property, when she passes and your wife inherits the house the cost basis will be the market value on the date of her passing. This of course could be substantially higher than the current $250k basis and thus reduce your tax burden should you eventually sell the property. One other strike against your plan, not that it is a bad plan, is nothing ruins family relationships more than financial/real estate dealings. What will you do when you get tired of paying the mortgage and want out of the deal? Or when you inherit the property and your brother in law feels he was shorted on the whole transaction? Can get pretty messy.

If there is enough equity in the house, your mother-in-law could do a reverse mortgage. She gets to keep the house, the equity loan is paid off, and she either gets a monthly income from the property or a single lump sum payment.

You and brother in law won’t have to take over the mother’s mortgage payments either.

Thanks for the replies. I did not consider any tax issues so that’s great advice.

The thing is, if she still holds the title and has equity, she may take out more money without telling us. The reason she is in this mess is because of very poor financial decisions. So if I’m gonna cough up $400/month I want title.

Another downside though is that if we own it then we maintain it, which is more out of pocket. Maybe we could make it part of the deal that she can live rent free as long as she wants, but must maintain it.

And I hear you on the family issues. Even though the Bro-in-law is a stand up guy, stuff happens. He could get laid off, or I could get laid off. Then the other is hit hard.

Dave, I thought the house has to be owned free and clear to do a reverse mortgage? I don’t know the current value on the house but I have to assume she’s only got 50% equity. The other issue which goes back to family is that my wife and brother-in-law spent childhood summers in this lake cove, and have lifelong friends and family there, so they would rather keep the property after their mother passes if they could. But they are also reasonable people so all options will be looked at.



I like Dave’s advice. The reverse mortgage will payoff the home equity loan and monies left over can be banked and utilized for living expenses, property maintenance etc. There are no payments to make on the reverse mortgage. When the MIL passes you (the heirs) have the option of letting the bank have the property as full payment of their loan or you can payoff the loan at that time, with cash or refi, and the property stays in the family.

There’s another issue you forgot about. What if she becomes ill and requires long term medical care. I’m assuming she has very little assets/cash or she wouldn’t have a problem. If she requires long term medical care (nursing home, visiting nurse etc…) those costs will add up FAST. She more likely will be forced to use Medicare/Medicaid. In order to do that, she’d have to have no more than $2000 to hr name. If she has a house in her name, the nursing home can take that asset. I’ve seen this happen. Before my father required long term care, my siblings and I went to a lawyer and put the house in our names. He had a legal right to occupy the house as long as he wanted (provided he was healthy enough to live independently). We did this about 5 yrs. before he needed long term care. I believe you now have to have this done at least 6 yrs. before long term care is needed. We still own the house and rent it out. If you guys are going to assume the pmts., you might as well purchase the home outright. If you loan her the money, you may never get paid back. Buy the house from her so she can pay off the 1st & 2nd mortgage. Then you can just let her live there. I don’t know how much she could afford for rent, but I think it would be better to keep this house in the family rather than have the bank or anyone else to get it. Good luck.

Phlemboy, Things may be different State to State buy in Mi. the assets are for vehicles and anything of value . Currently she has an equity loan making the home a liability not an asset. I just recently went through this myself.

That’s true. But I’m talking about in the future. It could be 10 yrs. from now. By that point there may be enough equity in the house where they force a sale. The only other protection MAY be a homestead exemption. But all that aside, I think the family needs to step in. It looks like they have concerns about her mismanaging the equity/finances. It may be better to just buy it outright and possibly use it as a rental or family vacation home in the future. If they do nothing, it sounds as if she may eventually default and lose the house. If it were me, I’d buy it so she won’t have to worry and the asset stays in the family. That’s assuming I could afford it. I sure hope it works out for everybody.

Medicare will cover the first 100 days of long term care regardless of income or personal wealth. After the 100 days is up, if the nursing home resident does not have other private insurance and can’t afford to pay the nursing home bills, then a state administered insurance program called Medicaid steps in.

It is a Medicaid requirement that benefits are only provided to indigent patients. This means that Medicaid will only pay the nursing home bills after the patient has “spent down” their assets to around $2000. Medicaid also has a five year lookback requirement. The value of assets that were transferred out of the patient’s ownership and control within the past five years can be counted against the patient’s net worth and that amount will also have to be “spent down” before Medicaid benefits will kick in.

Not all nursing homes accept Medicaid patients either.

You are correct Sir!

What sounds like the best solution is to have your MIL sell the house and move into something more affordable, even if she becomes a renter.

Thanks guys.

Yeah, i think you’re right, Dave. Or she could get a part time job and a roommate. She has an IRA and in 3 years social security. She just needs a bit more to get by on and to stop throwing away everything her husband set her up with before he died. I could go on and on…

Plus my brother-in-law is already saying that currently he can’t afford it.

I’m just glad my wife did not inherit her mother’s fiscal skills.