As your parents reach and settle into retirement years, it’s only natural to want to step in and care for them. But with caring for your parents also comes tending to their finances. While you’d like to think that they have enough cash to comfortably fund their golden years, this isn’t always the case. In fact, a recent survey found that 64% of Americans now expect to retire with less than $10,000 in their retirement saving accounts1—yikes.
But there is some good news. With today’s seniors owning a record-high $7.54 trillion in housing wealth2, tapping into home equity with a reverse mortgage could help your parents access the funds they need to live more comfortably.
Why Reverse Mortgages?
As aging homeowners continue to settle into retirement, they’re increasingly looking for access to their home equity to help fund their golden years—while remaining in their homes. A reverse mortgage helps accomplish exactly that.
As the aging in place movement continues to gain traction and an influx of retirees are opting to stay in their homes well into advanced years, reverse mortgages provide a great way to supplement their retirement income.
If your parents are age 62 or older and own their home, a reverse mortgage can help them access their home equity and get the cash they need—with no monthly mortgage payments required*. If they have an existing mortgage on their home, the reverse mortgage proceeds will first be used to pay that off. Without that monthly obligation, they’ll free up more cash to use as they wish. What’s more, cash received from reverse mortgages is tax-free and does not interfere with Social Security or Medicare benefits.
So, if your parents are part of the 90% of retirees wishing to stay in their home as they age3, the benefits of a reverse mortgage are especially appealing. But like any other financial decision, it’s important to first understand all aspects of a reverse mortgage. Let’s start by addressing the question we receive most often…
“How much money will my parents receive?”
The short answer here is, “it depends.” There are several variables that determine just how much of the home value your parents will be able to access. For instance, the borrowing limit known as the “principal limit” can depend on your parents’ ages, type of reverse mortgage, home value, and current interest rate. Let’s take a deeper look at the role some of these factors play in determining the “principal limit.”
Unlike a traditional mortgage, a reverse mortgage requires borrowers to be at least 62 to qualify. And when it comes to calculating the principal limit, age is also a factor. Because the principal limit accounts for the estimated length of the loan, the older your parents’ age, the more cash they’ll be able to receive. Just consider this: at the minimum age of 62 and a five percent interest rate, your parents could borrow against 52.4% of their home equity, whereas waiting until the age of 75 could allow them to borrow 61.4%4—nearly 10% more. Also, keep in mind that the age of the younger borrower is used to determine the principal limit.
Like with age, principal limit and home value also share a congruent relationship. The higher the value of your parents’ home, the more available cash they could receive. With this in mind, it is no surprise that one of the first steps in considering a reverse mortgage is to have an appraisal performed on your parents’ property. Not only does this determine their home value, but it also identifies any repairs required to meet satisfactory conditions enforced by the Department of Housing and Urban Development (HUD).
The relationship between interest rates and the principal limit is an inverse one. The lower the current interest rate, the more funds available. Fortunately, today’s rates are historically among the lowest we’ve ever seen—meaning more cash your parents can secure with a reverse mortgage. Learn more about reverse mortgage interest rates here.
When it comes to reverse mortgage loan proceeds, there are three main options for how your parents could choose to receive funds. The distribution method they select could affect the total amount they receive.
Lump Sum Payment
As its name suggests, a lump sum payment allows borrowers to withdraw all available loan proceeds at once. This distribution comes at a higher cost than other payout options because it requires interest and fees to be paid on the entire loan amount drawn at closing. Once this is factored in, the total amount of funds available may be lower compared to other options. It’s also important to note that lump sum payments do not have a credit line feature available and present a higher risk if your parents are relatively young and can potentially outlive the loan funds.
Line of Credit
A line of credit payout allows borrowers to access some funds immediately at closing and leave some available for future use. The remaining funds not taken at closing are kept in a growing line of credit, allowing borrowers to access a maximum amount as stated in the loan terms. With an adjustable interest rate, the distributions from a line of credit come at a lower cost than a lump sum payment because interest and fees are required to be paid only on the funds that are used. Better yet, your parents have the option to combine a line of credit with a monthly payout distribution.
Like the line of credit distribution, the monthly payout option features an adjustable interest rate and lower cost than a lump sum payment. With the ability to receive a monthly payout to supplement retirement income, borrowers are only required to pay interest and fees on the funds that have been drawn. And when it comes to account for payout, your parents have two options. They can either opt for a term payout, which provides fixed monthly payments for a set number of years, or a tenure payout, which provides fixed monthly payments for as long as loan terms are met and the payout does not cause the balance to exceed the set loan amount.
With so many factors playing a role in calculating the principal limit, these are just some of the important things your parents and family should understand before deciding to take out a reverse mortgage. As an adult child helping your parents consider a reverse mortgage, it is understandable to have a lot of questions. Rest assured, with a reverse mortgage, you, as an heir, can still inherit the home—just as you would with any other mortgage. When the loan becomes due, you decide the next moves to repay the loan balance. You can learn more about what reverse mortgages mean to your inheritance here.
Reverse mortgages are truly a family decision—and a well-informed discussion about how your parents can benefit from the loan is an important part of the process. At Longbridge Financial, we’re here to help. We guarantee to treat your parents with respect and do the right thing—including telling them if a reverse mortgage is not a good option for them.
To learn more about how your parents could benefit from a reverse mortgage or to see how much they could potentially earn in proceeds, check out our free calculator or contact the Longbridge team of experts today.
* Real estate taxes, homeowners insurance, and property maintenance required.