There are a number of interesting forces aggregating out there to make the protecting of the equity in your parent's home even more challenging. Make some good decisions here and you will reap the benefit. Make bad decisions and you will deal with them for years to come. Here's how all this is playing out:
Real Estate Values: The value of your parent's home may be stabilized or continuing to drop at this writing. In overbuilt markets like Phoenix, Las Vegas, California, etc. there is a big supply of new homes that will be sold at increasingly higher discounts as builders and lenders come under increasing pressure to clean up their balance sheets. In any event, make sure you know the real market value of their home before you make assumptions about what you will be able to sell it for.
Financial Advisors: Financial advisors, especially those in brokerage or securities firms are governed by a moronic agency named FINRA. FINRA prohibits financial advisors from recommending that older clients take the equity out of their homes and put it in any investment in the securities markets, an annuity or life insurance policy where the advisor may benefit from the commission paid. What FINRA has done is to make sure that the home equity is subject to continued loss in the declining real estate market while Advisors dance around the issue of how to advise you. FINRA was also partly responsible for the sub prime situation by not properly monitoring the activities of its member firms who sold those mortgages to investors. Here's what you should do: Ask your advisor to explain all the options for your equity management for your parents' home and then make the decision to invest or not invest in the above markets or products.
DRA: The Deficit Reduction Act extended the look back period for Medicaid in determining the transfer of assets from 36 months to 60 months. This means that if your parents may need state Medicaid to assist them with their long term care they need to consider the management of their home equity 8-10 years before that time comes to be in the safe zone. Disobey this rule and your parents may not qualify at all even if they need it and you could have your bank accounts and property levied or seized as the state tries to recover its' monies expended for your parents care.
Mortgages: This tool may be the life preserver of the majority of seniors who have their net worth predominantly tied into home equity. Usually RM's take your age, subtract 10, and that is the percentage of available equity you can borrow. The goal for the bank is to not over loan on a house. The goal for you is to borrow as much as you need to subsidize your income without endangering your dwelling.
Aging in Place: If your parents are contemplating aging in place, a RM above coupled with a companion care giver may be a solution to the care issue funding and capability. Most Americans (86%) would prefer to age in place while 98% of homes are not designed for them to do that. Get this one figured out pretty quickly because if you don't your parents will be sleeping in the dining room and using a Porta Potty in the garage.
