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Older adults face distinct financial challenges as they approach their retirement years, especially if their income declines. Fortunately, if they’ve gained equity in their homes, they can take out a reverse mortgage and turn their home into a source of funds without having to sell the property.
You might have concerns or mixed emotions about your parents taking out a reverse mortgage. However, if it’s the best option for them, maintaining an open line of communication and understanding the financial obligations involved, as well as how the loan will be repaid, can ease your concerns.
Key Takeaways
- A reverse mortgage can provide your parents with much-needed cash flow, but it will reduce the equity in their home.
- If you have mixed emotions or concerns about your parents getting a reverse mortgage, consulting a financial advisor or mortgage expert can help.
- Communicate your concerns with your parents before they take out a reverse mortgage.
What Is a Reverse Mortgage and Why Are Your Parents Considering One?
A reverse mortgage is similar to a second mortgage on a home. If a homeowner is age 62 years or older and has enough home equity, they may qualify for a reverse mortgage loan. The funds from a reverse mortgage can help your parents financially by boosting their retirement income. The lender can give your parents the funds in monthly installments, as a lump sum, as a line of credit, or some combination. Homeowners can use the money for anything they like.
A reverse mortgage can be helpful for those who have enough home equity but lack sufficient income to maintain their lifestyle or qualify for a traditional home equity loan.
Your parents can use the funds from a reverse mortgage to pay for:
- Medical expenses
- Retirement income
- Renovation projects (including aging in place updates)
- Debt consolidation
- Funding gifts for heirs
Important
With a reverse mortgage, your parents face the risk of losing their home. However, as long as your parents live in the home full-time, take care of the property, have an active home insurance policy, and continue to pay property taxes, they can’t be forced out of their home.
How a Reverse Mortgage Could Affect Your Inheritance or Family Finances
Taking out a reverse mortgage can impact your parents’ financial situation and the value of their estate. The funds from a reverse mortgage can help your parents maintain their financial independence in retirement. Conversely, since they’re borrowing against the equity in their home, the equity decreases over time, which could potentially put them in a financially vulnerable position.
However, repayment of the loan isn’t required unless:
- Your parents sell the home
- They move out, or it’s no longer their primary residence
- They pass away
If your parents pass away, you may be responsible for settling their estate. You can satisfy the loan by paying it off with your own funds and keeping the house, or you can sell it and use the funds to repay the debt.
Note
There are a few different types of reverse mortgages. The Federal Housing Administration insures federally-backed reverse mortgages, while private reverse mortgages are available for higher-value homes. You can also look into single-purpose reverse mortgage loans offered by your state or local government.
The Emotional Side: Empowering Independence or Creating Future Stress?
As your parents age, it’s natural that their finances become a greater concern for you. It can feel unsettling if it appears that your parents don’t have enough money to live on and are considering a reverse mortgage. Perhaps they face steep medical bills because their health has declined, or they’re trying to consolidate debt, and their incomes have been reduced.
Whatever the reason, it’s important for you to balance your emotions with your parents’ financial realities. Consider sitting down with them to learn more about their financial situation and why they need the loan. Depending on their financial situation and whether they have enough income, a home equity loan or a home equity line of credit (HELOC) might be a better option. Speak with a mortgage professional to understand your options.
It’s also vital to discuss the red flags they should watch for as they search for a reverse mortgage. For instance, find out if a lender is pressuring them to take out a loan.
Smart Ways to Approach the Conversation With Your Parents
When speaking with your parents, consider inviting a financial advisor or housing counselor to join the conversation, allowing you to set expectations and plan for the future. A federally-insured reverse mortgage by the Federal Housing Administration requires reverse mortgage counseling. Perhaps you can attend with your parents.
As you discuss getting a reverse mortgage with your parent, encourage them to ask the lender these questions:
- What are the upfront costs and fees for getting a reverse mortgage loan?
- What happens if I have to move to a nursing home?
- What financial responsibilities will I have after I get a reverse mortgage?
- What are our other options?
The Bottom Line
You don’t need to be afraid of a reverse mortgage. In the right situation and for the right financial goal, taking out a reverse mortgage can help your parents fund their retirement and manage their estate. With effective planning, good communication, and help from a financial expert, you and your parents can determine if a reverse mortgage is the best financial solution for them in retirement.
