If your parents are entering or already settling into retirement, you may find yourself stepping into a new supporting role—one where you’re helping them think through financial decisions, long-term plans, and how to stay financially secure as they age.
It’s no secret that retirement comes with its share of challenges. Many retirees transition to a fixed or reduced income, and when paired with today’s rising living costs, longer life expectancies, and increasing healthcare expenses, it’s understandable to wonder whether the resources your parents have saved will be enough.
Fortunately, there is another source of retirement cash flow older homeowners may be overlooking: home equity. Tapping into this equity they’ve spent a lifetime building with a reverse mortgage can provide meaningful financial flexibility, helping your parents achieve peace of mind while supplementing their retirement income.
Naturally, if your parents are considering a reverse mortgage, you may also be asking important questions of your own: How does a reverse mortgage work? What can they use the funds for? And what are its implications for me, as an heir?
This guide breaks down everything heirs need to know about inheriting a home with a reverse mortgage, so you and your family can move forward with clarity and confidence.
Reverse Mortgage Basics
Created specifically for homeowners 62+, a Home Equity Conversion Mortgage (HECM)–also known as a reverse mortgage–allows your parents to convert a portion of the equity they’ve built up in their home into cash flow. Instead of making monthly mortgage payments back on the loan, like with a traditional forward mortgage, they can convert a portion of their home equity into usable funds without any required regular payments. Of course, borrowers must meet their loan obligations, keeping up with their property taxes, insurance, and home maintenance.
If your parents still have a traditional mortgage on their home, the reverse mortgage proceeds are first used to pay off the remaining balance. And since monthly mortgage payments are optional with a reverse mortage,1 your parents may free up more cash each month, giving them breathing room on a fixed income.2
Of course, this raises the question, “How can my parents use their reverse mortgage proceeds?” The answer is simple—the funds can be used however they wish. Some of the most common uses include:
- Keeping more money on hand for everyday bills and expenses—especially in times of inflation
- Consolidating other debts, such as credit card balances
- Setting aside funds to help pay for long-term care in the future
- Making updates, repairs, or modifications to their home to age in place more comfortably
- Establishing a line of credit3 for unplanned or emergency expenses
- Funding hobbies and passions, or putting the funds towards long-awaited bucket-list travel
In addition to freedom in how you spend your reverse mortgage funds, there’s flexibility in how your parents may choose to receive the cash. They can opt to receive the money via a line of credit, lump sum, monthly payout, or a combination of these methods.3
What are the costs involved?
Just like a traditional “forward” mortgage, reverse mortgages have both upfront and ongoing costs that your parents will need to consider. Upfront costs may include a reverse mortgage counseling fee, loan origination fee, appraisal fee(s), an initial mortgage insurance premium (MIP), and closing costs. Fortunately, some of these fees can be financed into the loan, discounted, or waived, so out-of-pocket costs can be minimal.
Ongoing costs can include interest, servicing fees, an annual mortgage insurance premium (MIP), and long-term property costs. However, it’s worth noting that not all lenders charge the same fees. At Longbridge Financial, we do not charge our HECM borrowers servicing fees—a benefit that can help reduce long-term loan costs.
What are the loan obligations?
Reverse mortgages, like any loan, come with certain obligations. While your lender can go into greater detail on the property, occupancy, and other requirements your parents will need to meet, there are three main obligations with a reverse mortgage to keep in mind:
1. The home must be kept in good condition
2. Your parents must keep up to date with property taxes and insurance
3. Your parents must reside in the home as the primary residence
Failure to meet these loan obligations can result in the loan becoming due and payable.
Borrower obligations are also discussed during the required independent counseling session, which takes place before your parents’ application can be processed. This session allows your parents to speak with a third-party counselor who will ensure they fully understand the program, obligations, and repayment conditions—so you and your whole family can feel confident about them moving forward.
When/How is a reverse mortgage loan repaid?
A reverse mortgage becomes due and payable should any of these loan obligations no longer be met—or when the last surviving borrower sells the home, moves out, or passes away. As an heir, you will have the option to decide whether you want to repay the loan balance and keep the home, sell the home, or walk away and let the lender dispose of the property.
Keep the Home
If you choose to keep the home, you can either pay off the entire loan balance or 95% of the home’s appraised value—whichever is less.
Sell the Home
Many choose to repay the lender using the proceeds of the sale. If there’s money left over—meaning you sell the home for more than the loan balance—you get to keep the difference. If the loan balance is more than the sale price, you will not need to cover the remainder.
Deed in Lieu of Foreclosure
You can surrender the home to the lender by providing a deed in lieu of foreclosure. By signing this document, you legally transfer the title and ownership of the home to the lender.
If the loan balance exceeds the home’s value when my parents pass, am I responsible?
Nope! Reverse mortgages are non-recourse loans. This means that neither you nor your parents will owe more than the home is worth at the time the home is sold and the loan is repaid—even if the home depreciates in value to the point that the balance owed exceeds the value of the home.
Are there alternatives to reverse mortgages?
Families may be familiar with other options such as refinancing with a traditional mortgage or taking out a home equity line of credit (HELOC). But it’s important to understand how these alternatives compare—especially for older homeowners.
A traditional HELOC may work well during high-income years, but it can create significant challenges in retirement. After the initial draw period (typically 10 years), borrowers must begin repaying principal + interest—often resulting in sharp payment increases. For retirees living on reduced or fixed income, this sudden jump can create real financial strain.
Eventually, many older adults refinance a traditional HELOC into a reverse mortgage because they discover that a traditional HELOC is not built with retirees’ long-term needs in mind.
If you and your parents are interested in exploring a more retirement-friendly forward product, Longbridge Financial offers HELOC For Seniors®. This first-of-its-kind product was designed with 62+ borrowers in mind with flexible qualifications, up to $400,0004 at a fixed rate per draw,5 and reduced, interest-only payments for the life of the loan.1 Of course, it’s important to understand which home equity solution best aligns with your individual situation and goals when making your decision.
What about my inheritance?
With a reverse mortgage, your parents would be borrowing money against the value of the house and accruing loan interest and mortgage insurance payments. As such, the loan amount would increase over time.
However, the home may appreciate in value—so it’s possible that there would be money left over from the sale of the house that would go to you as an heir, once the loan is paid.
While your parents having a reverse mortgage could ultimately mean a reduced inheritance for you, it allows them to enjoy a more comfortable, secure retirement—right from the home they love. That’s what makes the program such a helpful solution for many older adults.
The Bottom Line
If you expect to inherit a home with a reverse mortgage, it’s important to have open and transparent communication with your parents. Understanding how the loan works—and discussing your family’s wishes and goals—can streamline the process and provide peace of mind for everyone.
At Longbridge Financial, we know that financial decisions require careful consideration—and borrowers often explore these decisions with their loved ones. Our experienced consultants have met with countless families to discuss their options, helping everyone feel informed and confident throughout every step of the process.
If you’d like to learn more or get personalized support, contact the Longbridge team today.