For many seniors, living on a fixed income is a way of life. Yet for some, social security and pensions aren’t enough.
Your parents may still have credit card debt or may have to cover payments for caregivers and other help. As their child, you see them struggle and you want to find a solution for them – which is where a reverse mortgage may come in handy. But how do you bring up something as sensitive as their financial situation?
In this article, we’ll cover how to discuss a reverse mortgage with your senior parents. This financial option is growing in popularity and, despite the misconceptions, it can help many people stay in their homes for longer, while easing their financial burdens. By having an informed and caring talk, you’ll encourage your parents to consider a reverse mortgage and readdress their approach to a better financial future.
How Do You Explain a Reverse Mortgage?
When first bringing up a reverse mortgage, it’s important that your parents have a clear understanding of what one is. They may have spent years paying off their mortgage, so their first question might be, “Does a reverse mortgage mean I get that money back?”
In a way, yes.
According to the National Reverse Mortgage Lenders Association (NRMLA), a reverse mortgage allows homeowners over 62 to take their home’s equity and convert it into cash. The mortgage lender pays cash to the homeowners in monthly installments, just like a mortgage payment. In other words, reverse mortgages are a way to give people like your parents access to their home’s equity without selling their house.
On a reverse mortgage, payment becomes due when the homeowner moves out of their home or passes away. Your parents would never have to worry about payments as long as they stay in the house. In the event of their passing, their estate would have to sell the home within one year, and the money generated from that sale would be used to pay back the loan.
How Can a Reverse Mortgage Help Your Parents?
Depending on your parents’ situation, a reverse mortgage can be a viable option with a range of benefits. Here are the main ways you can tell them a reverse mortgage would help.
They Will Experience Less Bank Control
Homeowners maintain the title and ownership of their home after obtaining a reverse mortgage. As nonrecourse loans, family or heirs wouldn’t need to worry about repaying them after their passing either.
Reverse mortgages are also regulated by the federal government, which means the bank wouldn’t be able to force your parents out of their home at any point. This particular misconception comes from the fact that in some instances, there may be no equity left in the home upon the homeowner’s passing. But without financial incentive to sell the home, the living family simply signs over the home to the lending bank.
It Can Ease Their Financial Burdens
Reverse mortgages are used by seniors to ease the financial burdens that come with older age.
Do your parents face any of the following expenses?
- Outstanding credit card debt
- Adult day care expenses
- In-home care expenses
- Expensive medication expenses
- Past-due property taxes
- Unmanageable current mortgage
If they do, they could be struggling to make ends meet and a reverse mortgage may be right for them.
It Won’t Interfere with Their Benefits
Despite common misconceptions, reverse mortgage payments are tax-free. What’s more, they don’t interfere with social security or medicare benefits. This would give your parents the ability to handle necessary monthly expenses upfront without having to worry about added costs.
They Can Stay in Their Current Home
One of the most significant benefits of a reverse mortgage is that it would allow your parents to stay in their current home. This is particularly helpful if feel they’re out of options due to their financial circumstances.
Even without any financial burdens, the monthly payments can also be used to live a more comfortable lifestyle, to finance large projects, or to put away in savings for emergencies.
It Can Assist Them with Downsizing
If your parents aren’t looking to stay in their current home, a reverse mortgage could still be useful.
The HECM for Purchase, or Home Equity Conversion Mortgage, is a program that allows seniors to purchase a new home by putting a reverse mortgage on it. Homeowners combine the money from their previous home’s sale, savings, and income sources with a reverse mortgage to finance the home. The HECM for Purchase is a good option for your parents if they’re hoping to downsize and/or relocate to be closer to you and your family.
What Do Your Parents Need to Consider?
Although a reverse mortgage offers major benefits to many seniors, there are several important considerations that your parents should make before moving forward.
Do They Have Ongoing Financial Obligations?
Despite the payments received from the bank, your parents would still be required to stay up-to-date on their home insurance and real estate taxes. They may be susceptible to default if they fall behind.
Homeowners are also required to maintain the condition of their home, including upkeep and necessary repairs. If your parents expect their home to require extensive renovations in the coming years, the money obtained from reverse mortgages may simply cover these expenses and nothing more.
Do They Rely on Medicaid?
Reverse mortgages can affect your senior eligibility for Medicaid. The program has income eligibility requirements, so if your parents elect to take a large sum over the monthly payment, this could put them over the threshold and disqualify them. If they rely on Medicaid to cover medical expenses, be sure to weigh the financial benefits of a reverse mortgage against the loss of coverage.
Do They Have Residency Obligations?
The home that the reverse mortgage would be taken out on would have to remain their primary place of residence. As previously mentioned, the loan is paid back upon the homeowner’s death or if the homeowner moves out. While there are circumstances where a younger spouse under 62 can stay in the home, other residents, such as family members, may not be so lucky.
Moving Forward with a Reverse Mortgage
Your parents will be required to schedule a HUD counseling session to ask any questions and ensure they fully understand the reverse mortgage product. The counselor will then issue a certificate saying they have completed counseling, which is required when applying for a reverse mortgage. Be sure that your parents only go through a certified member of the National Reverse Mortgage Lenders Association (NRMLA), who will uphold the highest standards throughout the process.
There’s a lot to consider when talking with your parents about a reverse mortgage. Their current living financial situation must be honestly weighed against potential gains. Yet regardless of their choice, it’s important your parents know that you’re on their side. You only want the best for them, and that’s why you want to discuss the reverse mortgage as a possible option. With that in mind, everyone will be more confident about whatever decision your parents make.