Take a moment to appreciate your parents – they’ve loved you, raised you, taught you right from wrong, offered sound advice, and led you toward success. And now, as they reach and/or settle into retirement years, their love and guidance remain unrelenting. But it’s no secret that retirement comes with its share of challenges – and now, you may find yourself in the supporting role as your parents navigate this next chapter.
When it comes to retirement challenges, adjusting to a fixed or reduced income can be a difficult feat. Pair this with increasing inflation rates and it’s easy for any retiree to feel uncertain about their financial standing. Fortunately, for senior homeowners there is another source of retirement cash flow they may be overlooking – home equity.
In fact, senior homeowners account for an all-time high $11.58 trillion in housing wealth1. And tapping into this equity with a reverse mortgage could be a welcome source of additional retirement income. But what exactly is a reverse mortgage? And what are its implications for you, as an heir?
Read on for everything heirs need to know about inheriting a home with a reverse mortgage.
Reverse Mortgage Basics
Created specifically for older homeowners, 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. If your parents have an existing mortgage balance on their home, the money from the HECM is first used to pay off the balance. And since monthly mortgage payments are optional2 on a reverse mortgage, they’ll be able to free up even more cash to use every month.
Naturally, this raises the question – “How can my parents use their reverse mortgage proceeds?” And the answer is simple: reverse mortgage proceeds can be used however they wish. Some common use cases we see 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 the home to live more comfortably
- Establishing a line of credit for unplanned or emergency expenses
Better yet, with a reverse mortgage, there are several methods for receiving funds. You parents can opt to receive the money via a line of credit, lump sum, monthly advance, or a combination of these methods.
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. It’s just our way of providing your parents great service – without the added cost. Learn more about reverse mortgage closing costs and fees, here.
What are the loan obligations?
Reverse mortgages, like any loan, come with their 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. The counselor’s responsibility is to certify that your parents understand the loan terms and conditions. At the conclusion of the session, a counseling certificate will be issued to your parents. Without this certificate, the lender cannot move forward with the loan application.
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
Under HECM regulations, you’ll have 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, FHA insurance will 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 your or your parents will have to pay more than the loan balance or the appraised value of the home at the time the loan is repaid, whichever is less. If the home depreciates in value to the point that the balance owed exceeds the value of the home, you will not be responsible for repaying more than what the home is worth at the time the loan is repaid.
Exploring Your Family’s Options
Are there alternatives to reverse mortgages?
Yes, many families look at refinancing with a traditional mortgage loan or a Home Equity Line of Credit (HELOC). However, a reverse mortgage is a more suitable option for older homeowners. That’s because it’s designed to be sustainable for those on a fixed or reduced income—be it now, or in the future.
While many people opt for a HELOC while they’re still working—this can pose a problem when the loan becomes due, typically 10 years later. Often at this point, they’ve retired and are living on retirement cash flow that’s about 75-80% of what it used to be. And when their HELOC payment suddenly spikes up 10 years into retirement, it may create a serious cash flow problem. In many cases, this results in customers refinancing from a HELOC to a reverse mortgage, once they’ve realized that it’s the better choice in the long run.
What if there’s an existing mortgage on the home, or an outstanding home equity loan?
The homeowner may still be eligible. In fact, many people refinance their existing mortgage(s) with a reverse mortgage in order to substantially reduce or eliminate their monthly mortgage payment. Proceeds from a reverse mortgage are first used to pay off any existing mortgage(s) on the home.
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, one the loan is paid.
While your parents having a reverse mortgage could ultimately mean a reduced inheritance for you, it can also allow them to enjoy a more comfortable retirement that helps them stay in their home longer. 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 consider your options and discuss them with your parent(s) beforehand. Understanding the nature of the loan and the options available can streamline the process and provide more peace of mind for everyone.
Like any financial decision, the decision for your parents to get a reverse mortgage is a big one. And often times, we see our clients looking to their loved ones for support and guidance along the way. At Longbridge Financial, we’re here to help. Our Loan Officers are experts in the business and have met with countless families to discuss the reverse mortgage program. They’ll answer any questions you or your parents may have, and provide personalized, professional support through every step of the process.