Blog content updated on 10/31/2021
With people living longer than ever, financial fitness is as important as physical health. In a clip from NBC’s Today Show, financial editor Jean Chatzky explains strategies for handling expenses for your parents later in life—including reverse mortgages and long-term insurance.
Learn how you can maximize your parents’ financial longevity in retirement.
The key to helping your parents make sure they don’t outlive their money is improving their cash flow. Some of the ways to do this include reducing their debt load (such as downsizing to a less expensive home) or finding new sources of retirement funding (such as tapping into their home equity). A reverse mortgage could actually help them do both.
With a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, the proceeds are first used to pay off the existing mortgage, eliminating that monthly mortgage payment. And since a reverse mortgage doesn’t require monthly mortgage payments1, it would allow your parents to regain that money every month to use for other needs.
The leftover funds can be taken as a lump sum of cash, a series of monthly payments, a line of credit, or in any combination. So it could not only help them reduce their debt, but create a new source of funds. Any unused portion of the line of credit grows over time, and could be used to protect against future expenses or inflation.
Where does the money come from?
For many seniors, their biggest financial asset is their home: the equity they’ve built up over the years by making monthly mortgage payments. Sadly, accessing that equity is an under-utilized strategy that many never even consider.
The statistics are stunning: according to the National Reverse Mortgage Lenders Association, the total home equity for homeowners age 62 and older in the U.S. reached a record $9.23 trillion during the first quarter of 20212. The average amount of home equity for senior homeowners age 65+ is $143,5003.
This means your parents may have a significant, untapped source of funds that could help them improve their cash flow—and avoid dipping into their invested assets, so those can continue to grow and last longer.
What should your parents know about a reverse mortgage?
All HECM reverse mortgages are insured by the Federal Housing Administration (FHA), which provides protection for borrowers. Here are some key facts to consider:
- With a reverse mortgage, your parents still own their home—not the lender—and they can continue to live in it as long as they wish.
- While no monthly mortgage payments are required, your parents must be financially able to keep paying property taxes and home insurance as they do now, and keep the home in good repair.
- The loan doesn’t come due until the last borrower passes away or leaves the home permanently—for example, if they need to move to a nursing home.
- If your parents need to move into a home that’s closer to family or better suited to their needs, there’s a reverse mortgage specifically designed to help older adults afford a new home: it’s called a HECM for Purchase loan.
How much money can your parents get?
That depends on a number of factors: their age, current interest rates, how much home equity they’ve built up, and how much the home is worth. You can try our Longbridge Financial reverse mortgage calculator to get a quick quote.
How do your parents know if it’s right for them?
With every reverse mortgage, counseling is required for your parents’ protection. It helps ensure that they fully understand the terms of the loan and know what their options and responsibilities are, so they can make the right decision. Learn more about what your parents can expect from reverse mortgage counseling in our article, here.
At Longbridge Financial, we guarantee that we’ll treat your parents with respect and do the right thing—including telling your parents if a reverse mortgage is NOT a good option for them.
What do you need to know about your parents’ reverse mortgage?
If your parents leave the home to you as an inheritance, you’d be responsible for repaying the loan—but that’s typically taken care of by selling the home and using the proceeds.
Here are other important facts as a reverse mortgage relates to you:
- When the loan becomes due, even if the loan amount owed exceeds the home value, you wouldn’t be responsible for paying the difference. That’s one of the protections built into government-insured loans.
- You can choose to keep the home and repay the loan yourself—but in this case, you’d be responsible for the full loan amount, even it’s more than the home is worth.
- If you sell the home to repay the loan and there’s money left over, that would go to you as the heir.
- Remember that the loan amount does increase over time, accruing loan interest and mortgage insurance payments—but the home may appreciate in value, as well.
The bottom line: your parents getting a reverse mortgage could potentially mean a reduced inheritance for you—but it could also help them enjoy a more comfortable retirement, or stay in their home longer. These are factors to weigh as a family.
Still have questions? Ask the experts at Longbridge: call 855-523-4326 or fill out the form on this page to get a free info kit. There’s no cost and no obligation.
To view the NBC Today Show video, click here.
- Real estate taxes, homeowners insurance, and property maintenance required.
- Joint Center For Housing Studies, 2018.