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What do my parents need to know about a reverse mortgage?
If your parents are age 62 or older and own their home, they can use a reverse mortgage to access their home equity and get needed cash—with no monthly mortgage payments required. If they have an existing mortgage, the reverse mortgage will first be used to pay that off. And without that monthly payment, they’ll have more cash each month to spend as they wish.
The most popular reverse mortgage is a Home Equity Conversion Mortgage (HECM). It’s insured by the Federal Housing Administration (FHA), which provides protection for the borrowers. Here are important things to discuss with your parents if they consider a reverse mortgage:
How much money can my parents get?
It varies, based on the age of the youngest borrower, current interest rates, how much home equity they have—and the home’s value, sale price, or the maximum lending limit, whichever is lowest. Try our quick calculator to get a free quote.
Counseling is required to help protect them.
The federal government requires everyone considering a reverse mortgage to have a counseling session with an approved Department of Housing and Urban Development (HUD) agency to ensure that they fully understand the terms of the loan, and that it’s a solution that meets their needs.
The HUD-approved counselor can explain how reverse mortgages work, and review your parents’ options with them. It allows your parents to ask the counselor any questions about reverse mortgages, so they can make an informed decision about whether it’s right for them.
How and when does the loan have to be repaid?
Reverse mortgages come due when all the borrowers no longer live in the home—whether that means they moved, had to go into assisted living or a nursing home, or passed away. Most often, the home is sold and the proceeds are used to repay the lender. If there’s any money left over, it goes to the estate.
It’s important to remember that if one parent passes away or moves out, and the other is not on the home’s title, or doesn’t meet the age requirement (62 and older), the reverse mortgage will not automatically transfer to them, and the loan will have to be repaid.
What about adult kids who live with their parents?
The situation described above also applies to other residents in the home—including adult children of the borrowers. If parents leave the home and the loan can’t be repaid through other fund sources, the home would have to be sold, and any adult children or other residents would have to find another place to live.
How will my parents’ reverse mortgage affect me?
If your parents leave their house to you as an inheritance, you’ll be responsible for repaying the loan—again, most often this can be done by simply selling the home and using the proceeds. This way, even if the loan balance exceeds the value of the home, you won’t have to cover the difference. That’s one of the protections supplied by government-insured reverse mortgages.
If you don’t want to sell the home, you could pay off the loan yourself, using other sources of funds. But it’s important to remember that in this situation, the full amount of the loan has to be repaid—even if the amount owed is more than the value of the house.
What about your inheritance?
Since your parents would be borrowing money against the value of the house, and accruing loan interest and mortgage insurance payments, the loan amount will increase over time.
That said, the home may appreciate in value—so it’s possible that there may be money left over from the sale of the house that would go you as the heir, once the loan is paid.
But it’s important to consider that while your parents having a reverse mortgage could mean a reduced inheritance for you, it also can allow them to enjoy a more comfortable retirement that helps them stay in their home longer. That’s what makes it a helpful financial solution for many older adults.