From managing your work-home balance, to preparing your children for and enrolling them in college, to even caring for aging parents, your generation has a lot on its plate. It may seem that every time you turn around, you’re faced with more responsibilities—and, consequentially, expenses. And when you factor in today’s volatile market and economy—with retirement savings depleting, spiking unemployment rates, and general uncertainty surrounding government benefit programs—many adult children are concerned about their parents being able to maintain financial stability through their retirement years.
If your parents are 62 or older, and if monthly bills and healthcare costs are becoming a struggle for them, leveraging their home equity with a reverse mortgage could be a smart solution. A Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM)—also known as a reverse mortgage—enables your parents to tap into their home equity and get the cash they need to live more comfortably.
While this solution may sound too good to be true, it’s important to remember that a reverse mortgage is a loan—and, like all loans, will eventually need to be paid back. However, unlike traditional “forward” mortgages, your parents are not required to make monthly mortgage payments as long as the home remains their primary residence*. The loan only becomes due when all the borrowers on the loan no longer liver in the home—whether that means they relocated, moved into an assisted living or nursing home, or passed away.
Repaying the Loan: Rules You Need to Know
Should your parents leave the home to you as an heir, you assume responsibility for the full loan balance—regardless of whether or not you intend to occupy the home. And if you’re left with this obligation, it’s important that you know all your options; you can:
Repay the loan and keep the home
The first option you have as an heir is to arrange your own financing, pay off the loan, and keep the house for yourself or your family. And when it comes to payment, you can either refinance the reverse mortgage as a standard, traditional mortgage or pay the lesser of the loan balance or 95% of the home’s appraisal value.
Sell the home and keep remaining funds
As an heir, you may lack the funds needed to pay off the loan—and, instead, choose to sell the home. Should you choose this option, the lender will take the proceeds from the sale as payment on the loan, and any additional funds from the sale will, in turn, go to you.
Do nothing with the home and deed it to the lender
If the balance on the home exceeds the home’s value, you may opt to deed the home to the lender. Reverse mortgages are non-recourse loans (more on this in a minute!), so no repayment beyond the home’s value is required.
“Will I ever have to pay more than the home is worth?”
The short answer here is—”no.” Because reverse mortgages are non-recourse loans, you will never owe the lender more than the home is worth at the time of its sale. In the event the loan balance is greater than the home’s appraisal value, the excess amount is covered by federal mortgage insurance—the Mortgage Insurance Premium (MIP) your parents paid over the course of the loan.
“So, what does this mean for my inheritance?”
If your parents are considering a reverse mortgage to help alleviate retirement expenses, it’s only natural to wonder what exactly this means for your inheritance as an heir. Since your parents would be borrowing against the value of the house, thus accruing loan interest and mortgage insurance payments, the reality is that the loan amount will only increase over time. As such, while you won’t receive every cent of equity as an heir, you will (in all likeliness) still receive an inheritance. And while a reverse mortgage could ultimately result in a reduced inheritance for you, it’s important to remember its main purpose: to allow your parents to enjoy a more comfortable retirement and stay in their home longer.
While a reverse mortgage can be a financial life-saver for seniors struggling to make ends meet come retirement, there are also a number of factors to consider when making this important financial decision.
At Longbridge Financial, we remain committed to providing you and your parents with the resources and education needed to make a smart and informed financial choice. We will help your parents determine what reverse mortgage solution is right for them. Not all lenders make this commitment.
* Borrower must continue to pay property taxes, homeowners insurance, and for property maintenance required.