Perhaps your parents are aging in place and have come to accept life’s daily gifts of a dwindling pension; if they even have one, never increasing Social Security income, and keeping their financially dependent goals as dreams. Perhaps they are chafing at the idea of having to choose to pay for a new hot water heater versus a trip to attend a grandchild’s wedding? Perhaps medical bills have demanded all of this month’s (and the next, and the next…) available income?
The economic environment of the last decade has turned many folks on their financial heads. Many adult children are worried about their parents being able to financially afford a quality of life they might have had prior to retirement. A majority of older Americans own their own home and have the bulk of their wealth tied up in their home’s equity. Parents who now struggle to pay monthly bills or “go without” may be better served by accessing their own equity. A reverse mortgage can offer that equity access option.
What is a reverse mortgage? A reverse mortgage is a loan that allows homeowners aged 62 or over the ability to convert part of the equity in their home to cash without requiring ongoing mortgage payments.
“Since this is a mortgage, will it increase my parent’s monthly expenses?” As long as your parents are living in the home, they will not have to make any further mortgage payments for that home. They must remain current on paying their property taxes and homeowner’s insurance, two bills they were already paying!
“We’re afraid. We’ve worked so hard to own our own home, we don’t want to give it back to a bank,” your parents may think. The actuality is their home remains their own. They will continue to keep title in their names.
“What happens if the balance is more than the value of the home when Mom and Dad move or pass?” You may worry that your parents heirs will be left with an unforeseen debt Mom and Dad hadn’t intended to put off on family. A reverse mortgage is a non-recourse loan. If the loan balance exceeds the appraised value of the home, the FHA insurance covers the loss. The FHA insurance will pay the outstanding balance to the lender with proceeds from the FHA insurance fund. This is precisely why FHA insurance is part of the HECM loan.
“At the end of the day, can we keep the home? What if the home is worth more than the reverse mortgage balance, can we keep the equity?” Yes and yes. After your parents have moved out of the home the outstanding balance can be refinanced, just like a traditional mortgage. And, if the home is worth more than the outstanding balance and your parents are no longer living in the home, in addition to the refinancing option, you can sell the home and distribute the proceeds as your parents planned.
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