Question about paying off dad's mortgage...

[CindyBlue]

Trying to make a long story short, but not sure I'll be successful...

Dad's just been admitted to a nursing home. His property was in a revocable trust, which we moved to irrevocable to save it from medical bills and possible medicaid recovery. He was allowed (against any sane person's better judgement!!) to take out a loan with a certain bank (which I will never have dealings with after this mess is cleared up, especially after the hassle of dealing with them as dad's POA as his capacity diminished) with the property as collateral a few years ago, when he was clearly declining.

Anyway, we want to pay off the remaining amount of the loan, about $80,000. I went through a huge hassle trying to get ahold of someone at said bank - took weeks and tons of non-answered phone calls and emails, since the local bank (dad's bank) that I've been dealing with is closed due to the coronavirus situation. Thank goodness I was added to the loan (as of last year) as his POA, or they wouldn't let me do it (seems to me they'd rather have their money no matter who gave it to them - so weird!)

My question is...with the economy the way it is, should we pay it off? Or should we keep paying it off monthly (around $900/month) so we have that large chunk of cash in the bank in case we need it?

Our inclination is to pay it off, just to get it over with. It's a large chunk of money for us, but we have enough in savings to do it and (hopefully, because everything is so strange economically that who knows what till happen!) should have enough to make it during our retirement if we do pay it off.

I'd sure appreciate everyone's thoughts and opinions about this...

 

[davebarnes]

Name the bank

 

[pb4uski]

....It's a large chunk of money for us, but we have enough in savings to do it and (hopefully, because everything is so strange economically that who knows what till happen!) should have enough to make it during our retirement if we do pay it off.

I'd sure appreciate everyone's thoughts and opinions about this...

Who is "we" in the bolded part above? You or the trust?

 

[OldShooter]

... His property was in a revocable trust, which we moved to irrevocable to save it from medical bills and possible medicaid recovery. ...

I don't think that would work in our state. Do you have solid legal advice on using this tactic? IOW, if the tactic fails does the presence or absence of the $80K become important?

 

[pb4uski]

I don't think that would work in our state. Do you have solid legal advice on using this tactic? IOW, if the tactic fails does the presence or absence of the $80K become important?

OS, I'm guessing that they converted the revocable trust to an irrevocable trust over 5 years ago for Medicaid LTC planning purposes.... but just a guess on my part.

 

[CindyBlue]

The "we" is me and my husband.

We have paid all of his medical bills so far, and also, the Medicaid was retroactive to January, which was when he went into the hospital and from there to the nursing home, so we shouldn't have more than about $1700 in bills that we might be forced to pay.

The conversion to the irrevocable trust was done by a lawyer with advice from a (paid) MediCaid specialist. And in our state, the house and property is exempt from Medicaid going after it, anyway. Also anything in a trust. We just made it irrevocable to make absolutely sure. He did qualify for Medicaid. He had no "assets" except for social security.

My concern is if we should just pay the loan payment and accept having to (ugh!) pay all the interest in order to have the extra $80,000 in our account because of the state of the economy.

 

[pb4uski]

Ok, now I'm confused. Does the trust have any assets other than the house? Are the mortgage payments being paid by other income/assets of the trust or by you personally?

 

[Z3Dreamer]

You don't state the interest rate on the loan and your rate of return on your savings. That might be an important consideration.

Big picture. Dad is in the nursing home and most likely will come back to the house. The house has so much more value than the loan.

You want to pay off the loan rather than let it go into foreclosure because you need a place for dad.

You are the sole beneficiary of the trust so you are of the opinion that you will, at some point, get your money back.

If all of the above are true and the rate of the loan is high (subjective?) I would pay it off.

 

[CindyBlue]

Ok, now I'm confused. Does the trust have any assets other than the house? Are the mortgage payments being paid by other income/assets of the trust or by you personally?

Nope, the only thing moved to the irrevocable trust was the property. The other trust still exists, and holds his bank account. The loan payment was coming from his social security, which was being deposited into that account, and he has no other assets at all. Believe me, I've checked. It's been a very rough year and a half.

Now that he has finally qualified for Medicaid, that social security money coming in every month must all (except his Medicare advantage and a small amount for "personal" (under $50)) go to his nursing home for his "share of cost." That means that we will have to pick up the loan payment ourselves. So we think we'd rather pay it off than have to worry about paying it monthly. I was able to get my name onto that account about a year ago, as he was beginning to decline, but just enough that he signed over POA to me,so I am allowed to pay it off (I finally got ahold of someone at the bank today who said I can pay it off.)

According to the loan statements, the payment every month consists of about half the payment being the principal and the other half is the "finance charge." It's due in 2029. I did find out that it's about $14 per day in interest.

But back to my question...in this economic environment, should we make sure we have that extra money in our account just in case? Or pay off the loan to just get it done? Our instinct is to pay it off, but with this economic uncertainty, we are wondering if we should keep the cash just in case...decisions, decisions...

 

[CindyBlue]

You don't state the interest rate on the loan and your rate of return on your savings. That might be an important consideration.

Big picture. Dad is in the nursing home and most likely will come back to the house. The house has so much more value than the loan.

You want to pay off the loan rather than let it go into foreclosure because you need a place for dad.

You are the sole beneficiary of the trust so you are of the opinion that you will, at some point, get your money back.

If all of the above are true and the rate of the loan is high (subjective?) I would pay it off.

There is no chance that dad will come back to the house. But we live here, and did while we were taking care of them (my folks and we planned for this about 25 years ago, my mom died over 20 years ago) and if we lose it we lose our home, so foreclosure isn't an option. We could sell it, but the money (except for our expenses, such as the loan payoff) must remain in the trust until dad passes, because the trust was written that way. We want to stay, though, as long as we are able to care for the property.
I think I remember that the loan interest is around 7.5%, but I'm not sure. I will ask at the bank when I go in.

 

[CindyBlue]

It just occurred to me, (and please know that I have little to no experience in mortgages or loans) that I might have labeled the title of this thread incorrectly (please be patient with me in my ignorance!) Is it called a "mortgage" if it's a loan taken out with the property as collateral? Or is it called a "loan"? This was definitely a loan taken out by dad with the property as collateral, as I tried to explain in the first post.

 

[Z3Dreamer]

It just occurred to me, (and please know that I have little to no experience in mortgages or loans) that I might have labeled the title of this thread incorrectly (please be patient with me in my ignorance!) Is it called a "mortgage" if it's a loan taken out with the property as collateral? Or is it called a "loan"? This was definitely a loan taken out by dad with the property as collateral, as I tried to explain in the first post.

At 7.5% everyone would urge you to pay it off. You shouldn't have to ask the bank for the rate. Each month, the statement you get should tell you the rate.

 

[pb4uski]

Yes, a mortgage is a type of loan collateralized by real property.

I think a key thing to verify is the interest rate. 7.5% sounds a bit high, especially for a $900/month payment on an $80,000 loan with 9 years left... I think ~5% is probably more likely.

In any event, I think I would not pay off the mortgage and keep the $80,000 of cash that you would have used to pay off the mortgage on the sidelines. If something happens and you need money if you don't pay off the mortgage you'll have what you need... if you drain your cash to pay off the mortgage then you are stuck... you would have to take out a home equity loan or a new cash-out mortgage in order to get back that liquidity.

 

[CindyBlue]

I am learning a lot, very fast. I sure appreciate everyone's advice and especially your patience and kindness as I try to figure things out. I'm not stupid, honest, just very inexperienced!

Ok, just looked more closely at the statement. It says that the Annual Percentage Rate (fixed) is 7.15%. That's about what I remember. That seems to me to be a lot to pay. On the monthly statement I see that the payment consists of half principal, and half interest, almost an exact match. that seems to me to be a lot of money to pay out just to be able to pay it over time (ends in 2029.)

May I think out loud so you can hear my thoughts and hopefully have more advice for me? We got about $200,000 from my grandmother's estate that has (stupidly, I know) just been sitting in a savings account for about three years. (We should have put it into a CD or something, but we never did (I know, really stupid, bordering on incompetent!) Our (lame) excuse is that we were dealing with so many other things in dealing with dad and his wife, both in poor physical and mental health, that we just never got around to it.) Therefore that money is available to pay off the loan. We have no idea, now that the economy is in such fragile state, where to put that money safely to make a little interest. But it's certainly being wasted where it is, and paying off that loan with it seems a decent use of money to save paying out that kind of interest.

Since dad only gets social security, is there any advantage to being able to deduct his interest on his taxes, as I keep hearing is an advantage of having a mortgage payment? Come to think of it, can he deduct the interest? I have to go look at his tax form for this year...not sure it was even done (I just had his taxes done at the same place he's always had it done.) I believe I was told that his income is now so low that he doesn't have to file his taxes anymore, but I need to look that up and verify it.

This is such a tough decision, and even harder because I don't know what I am going. I've never had a mortgage, always rented. I am so grateful for they help/advice/opinions (and maybe some chastisement?) that you can give me.

Sigh...I'm going to whine a bit...it was hard enough to figure out my own retirement over the past three years (and thank goodness I had your help here at the FIRE forum!). But also having to deal with my grandmother's decline and placement in assisted living and death and estate, and then right after that, dad's decline, plus all the problems he caused by not paying bills etc., and all the problems getting Medicaid etc., dealing with nursing home placement, etc. And now this decision...I want to crawl into a hole for awhile, but I can't. I'm the "responsible one." I simply have to make the right decisions.

I appreciate any and all comments and advice!

 

[pb4uski]

If you have $200k in cash and the $80k mortgage is 7.15%, then I would pay off the mortgage... from what you wrote in the OP it sounds like paying the $80k mortgage would drain your cash, but given that you'll have $120k left that should be plenty for emergencies.

That said, I have a bit of discomfort in advising that you pay off the mortgage. If you owned the house then there would be no discomfort, but in this case essentially you are paying off the mortgage on your dad's house. I assume that you are the sole beneficiary of the trust once he passes so in effect the house is yours. I'm just wondering if there might be any risk that another party could come along and lay claim to the house or the trust... I suspect not but you never know. Have you discussed this idea of paying off the mortgage with your lawyer or the lawyer that set up the trust?

If your Dad's income is only SS, then it is very likely that he doesn't need to file a tax return and mortgage interest would be of no benefit to him.

 

[38Chevy454]

Sorry to hear of your father's decline and it is a tough position to be in. The fact you live in the house means that a sale of the house is out of the question unless you want to move. Sounds like you want to stay. So the options are to pay each month, or pay loan off.


From a pure financial standpoint, in the case of using your inherited savings to pay off the loan is easy: <1% income on savings, vs 7.15% cost for loan. The bigger question is if you will need any of that savings money in the next X months/years while your father is still alive and before the house is sold by his estate. I realize you are likely the estate receiver, and you will be able to keep the house. Just saying that now you have no ownership interest in the house.


I would check very carefully about the time limits for the irrevocable trust and medicaid recovery rules. The 5 year limit I believe is pretty constant across states and sounds like you are less than 5 years. Your father also sounds like he may not make it to the 5 year time limit. The result being that you may not be inheriting the house, at least not the full amount, depending on the medicaid recovery rules. Your state rules may also play a role. I am not an expert in this, but it would be very smart for you to absolutely verify the state rules you are under. Not the time to make assumptions.


As for your father and his social security, yes the rule is that he can only have $50 for some personal expenses out of the monthly check. At least here in Ohio that is the rule, and the $50 is supposed to be for items that are not provided by the care facility. I do not think you can take the $800-ish payment for the loan out and then leave the rest for the care facility.


It seems with your situation that you need to talk to some estate planning experts in your state and learn more before you make any decisions. In other words, if your father may have expenses more than the house and your state medicaid can recover money from the house after death, you will not be inheriting any house. So you paying it off now is not wise, it just takes money out of your pocket. In very rough calculation, $80K of loan divided by $800/month means approx 100 months. Is you father expected to live that long? I doubt it from your description. The big question here is whether the house is insulated from medicaid recovery.

 

[spncity]

Sorry if I missed something. Just to clarify -

How long since the house was put into an irrevocable trust?


Does the trust document give you the power to sell the property? If so, are there limits on when you can do that?


How long were you living in the house with him as caregivers?

And do we understand that it is now your residence and you don't have other residences?

 

[ivinsfan]

Your Dad has a wife? That could make a difference....If his wife is still living I would not pay off the house. I'm having a hard time thinking about any conditions where I would use my money to pay off someone's else house, under the conditions you are talking about.

 

[Z3Dreamer]

I agree with consulting the attorney before moving forward. So many facts, we here on ER don't know. And none of us are pro's. You might use us to flush out all the details so that you have the whole picture when you meet with the attorney.

Father's house, that you live in has been in an irrevocable trust since xxyy?
You are not liable for the debt but are paying the mortgage and other maintenance costs of the house because you are the trustee of the trust, are living there and are the sole beneficiary of the trust?
The trust has no other assets?
His finances were a mess but you have paid them all off personally, possibly using an inheritance from GM?
House is worth $x?

There are some weird possibilities out there. If the house is worth $100,000 and the debt is $80,000 and you are not liable for the debt, you may be better off not paying off the debt. Just live there, assuming you like it, and make the payments until Dad passes. Then if Medicaid does their claw back, great. Between them and the bank they eat up the equity in the house.

If the house is worth $850,000 and the 5 year Medicaid window is almost over, then paying off a 7% plus mortgage is a good thing.

 

[ivinsfan]

The "we" is me and my husband.

We have paid all of his medical bills so far, and also, the Medicaid was retroactive to January, which was when he went into the hospital and from there to the nursing home, so we shouldn't have more than about $1700 in bills that we might be forced to pay.

The conversion to the irrevocable trust was done by a lawyer with advice from a (paid) MediCaid specialist. And in our state, the house and property is exempt from Medicaid going after it, anyway. Also anything in a trust. We just made it irrevocable to make absolutely sure. He did qualify for Medicaid. He had no "assets" except for social security.

My concern is if we should just pay the loan payment and accept having to (ugh!) pay all the interest in order to have the extra $80,000 in our account because of the state of the economy.

I'm wondering what kind of "expert" you have,cause the part about the house and property being exempt after he dies seems shady. exempt from what..

 

[CindyBlue]

Thank you for your very thoughtful and detailed response.
You are right - I cannot take out the loan costs from dad's "share of cost." That's why we are thinking seriously about paying off the loan - otherwise (and either way, really) we must pay it. There will be no money left in his account to pay it.
We hired a MediCaid expert to do his application, and that person recommended a attorney who specializes in both MediCaid and trusts. I asked my attorney again this morning if moving the property from the revocable trust (established in the 90s sometime) to the irrevocable one (done late last year) would mean that MediCaid could somehow say that's no good because of the 5 year lookback period, and he assured me that it was not a problem. Both have told me more than once (because I keep asking!) that MediCaid cannot recover anything that is in the trusts. California made a law in 2017 that specifically prohibits it. I hope they are right- I paid a lot of money (especially for me!) for their work and advice.

 

[CindyBlue]

Your Dad has a wife? That could make a difference....If his wife is still living I would not pay off the house. I'm having a hard time thinking about any conditions where I would use my money to pay off someone's else house, under the conditions you are talking about.

She passed on May first of the year...like I said, it's been a tough year for everyone around here...sigh... And they had a prenuptial that specifically separated hers and his - nothing in this trust goes to her or her family. It's really clear, and both her lawyer and our said it's truthful and valid.

 

[CindyBlue]

" You might use us to flush out all the details so that you have the whole picture when you meet with the attorney."

That's exactly it! The FIRE forum is such a valuable resource!! The more questions I ask here, the more ideas I get and questions I have, but in a good way. I'm gathering information from you generous folks who have much more experience and knowledge about these types of financial matters than I do. I am so grateful!

 

[Gremlin]

She passed on May first of the year...like I said, it's been a tough year for everyone around here...sigh... And they had a prenuptial that specifically separated hers and his - nothing in this trust goes to her or her family. It's really clear, and both her lawyer and our said it's truthful and valid.

Wow, CindyBlue. It really has been a rough couple of years for you. I don’t have any advice to offer. But I would like to offer you my condolences. I hope smoother sailing is ahead for you and yours!

 

[CindyBlue]

"I assume that you are the sole beneficiary of the trust once he passes so in effect the house is yours. I'm just wondering if there might be any risk that another party could come along and lay claim to the house or the trust... I suspect not but you never know. Have you discussed this idea of paying off the mortgage with your lawyer or the lawyer that set up the trust?"

Thank you for thinking of this. I am the beneficiary of the trust, with the stipulation that I must give 1/6th the assessed value of the property to my sister (and also 1/6 would have gone to my brother, but he's passed and the trust specifically states that nothing goes to his heir (one daughter) unless I die before dad does...weird, I know, and my attorney thought it was weird, too, but that's what it says. We'll deal with that when the time comes, I guess.

Yep, discussed paying it off with my attorney, but he basically says it's my decision. He wouldn't give his opinion on that, and I understand. He did say that if we really needed the money back, we can sell the house, and recover our expenses (i.e., the $80,0000) and then the rest of the money has to stay in the trust to "indirectly benefit" dad until he passes.