Reverse Mortgages: A Good Idea for Your Parents?

If your mom and dad (or just one of your parents) are considering a reverse mortgage, chances are they let you know about it—and you probably have some questions of your own. Read on for a primer for adult children of prospective and current reverse mortgage borrowers. What is a reverse mortgage? Let’s start with the basics: a reverse mortgage is a loan that allows people to borrow against the the equity they’ve built up in their homes. The vast majority of reverse mortgages are issued under the federally-insured Home Equity Conversion Mortgage (HECM) program. What’s the point of a reverse mortgage? Reverse mortgages can be an appropriate financial product in a variety of situations. Sometimes borrowers opt to take out the loan because they are “house rich” and “cash poor.” Others get a HECM as a retirement planning tool. Reverse mortgage proceeds can be accessed in a few different ways:

• Lump sum
• Monthly term or tenure payments
• Line of credit
• Some combination of the above

The way your parents choose to receive their loan proceeds may vary based on their particular situation and objectives. For example, if they want to pay off an existing, “forward” mortgage, they may want (or need) a lump sum payment. If they’re looking to improve their monthly cash flow, they could opt for monthly payments. Or perhaps your mom and dad are planning for retirement and would like a line of credit they can draw down as necessary. Will my parents have to make monthly loan payments? No. Unlike a conventional mortgage, reverse mortgages do not require monthly loan payments. However, borrowers are required to stay current on property taxes and homeowners insurance throughout the term of the loan, and must also maintain the property to certain standards under FHA guidelines. Does the bank own the home after a reverse mortgage? No. Your parent(s) will keep the title of the home and remain a homeowner until it is inherited. At that point, the heirs will own the home and will need to repay the reverse mortgage. When does the loan need to be repaid? Reverse mortgages become due and payable when the borrower(s) pass away or leave the home, whether it’s to move somewhere else or enter a long-term care facility. Are reverse mortgages safe? HECMs come with some built-in protections, including Federal Housing Administration insurance and their non-recourse feature. Reverse mortgage borrowers pay a one-time mortgage insurance premium when the loan is first closed, along with ongoing mortgage insurance premiums. In exchange, borrowers’ proceeds are guaranteed by the FHA, so even if a lender went out of business, a borrower would still be able to access his or her remaining loan proceeds. The non-recourse feature means that reverse mortgage borrowers and their heirs don’t have to repay more than what their home is worth at the time the property is sold, even if the loan balance ends up exceeding the current appraised market value. How can I be sure my parents know about how reverse mortgages work? All prospective borrowers are required to go through mandatory reverse mortgage counseling with an approved counseling agency prior to submitting a loan application. Counselors are there to help your parents understand their options and make sure they know about how the loan works. Because counseling agencies function as a third party, their goal is not to steer your parents toward the loan—they’re truly there to help. Reverse mortgage counseling can be conducted in person or over the phone and typically takes about an hour to an hour and a half. For married couples, both spouses must attend counseling. Other family members are also encouraged to attend, so this could be a great opportunity for you to learn more about reverse mortgages. Still have questions about the reverse mortgage program? We can help. Learn more here.