My Parents Don’t Need a Reverse Mortgage — Do They?
Most likely, you’ve heard lots of negatives about reverse mortgages. Between the local paper, evening news and those late-night commercials, the information presented really does impact people’s perceptions of the product.
Having your parent or a loved one mortgage their house — either through a reverse mortgage or a traditional mortgage loan at the bank — can seem disconcerting. But it is important to measure the impact.
While having an “inheritance” may be nice, most adult “kids” would likely prefer their parents (or other older family members) live safely and comfortably without having to worry about mortgage payments. Between the costs of housing and medical expenses, it can be very hard to juggle finances on a fixed income. This often leaves adult children with anxiety and concern about their parents’ finances as well as their own.
If you’re a member of the “Sandwich Generation” — simultaneously raising a family, funding your children’s education, caring for aging parents and attempting to save for your own retirement — you know it’s aptly named, because it’s hard not to feel the financial and emotional squeeze when you’re squarely in the middle. Having to worry about the costs of your own children while helping out a parent can unfortunately bring on weighty feelings of guilt and stress.
One source of relief may be their home equity. According to the Center for Retirement Research at Boston College, home equity is generally the largest asset for most households, yet it is typically underutilized for retirement.
In fact, older Americans have approximately $7 trillion in equity “trapped” in their homes.* Perhaps it’s time to revisit ways to use home equity in retirement to help improve monthly cash flow, restructure high-interest credit card debt, and establish a “standby” line of credit that can be used for emergencies. That’s why it’s vital to have a candid conversation about finances sooner rather than later.
The cons of traditional financing
Many families consider refinancing with a traditional mortgage loan or a regular Home Equity Line of Credit (HELOC). Here are some facts you should consider when shopping for a loan:
- With a traditional mortgage, home equity loan or home equity line of credit, borrowers must meet income requirements and have a documented income stream to qualify. So it can be difficult for retirees to qualify.
- Mandatory monthly mortgage payments can greatly impact monthly cash flow, and can be especially burdensome for those on a fixed or reduced income.
- Considering a Home Equity Line of Credit (HELOC)? When the minimum required monthly payments increase after the loan’s initial interest-only period, borrowers often suffer from sticker shock.
Demystifying the reverse mortgage
Like traditional loans and lines of credit, reverse mortgages are widely viewed as a smart financial planning option under the right circumstances. Here’s a basic primer so you can assist your older relatives in the decision-making process.
“The bank will own their home.” In fact, as with any mortgage, the borrower holds the title to the home.
“It’s a loan of last resort.” Recent product advances have made reverse mortgages more attractive. The product’s versatility and flexibility actually serves a wide range of borrowers, from those of modest means to financially savvy, affluent homeowners and homebuyers.
And academic researchers and financial advisors have developed effective strategies for using a reverse mortgage as part of an overall retirement plan.
“My parents can just refinance to lower their monthly expenses.” Depending on interest rates, refinancing can often result in a lower monthly mortgage payment. However, reverse mortgages have a flexible repayment feature that enables homeowners to dramatically reduce or even eliminate their monthly mortgage bill — because it gives them the freedom to make any sized monthly payment they choose, or even none at all. As with any mortgage, borrowers have to meet their loan obligations, keeping current with property taxes, insurance and maintenance.
Like any mortgage loan, the cost of a reverse mortgage depends on the lender, the type of loan, and how much money is taken out at the start of the loan. There is a fee for reverse mortgage counseling that’s paid directly to the counseling agency. Depending on the loan option chosen, there may be an origination fee, closing costs, a mortgage insurance premium, and a monthly servicing fee. Apart from the counseling fee, any up-front costs are commonly paid by rolling them into the loan itself, so the out-of-pocket expense is minimal.
A reverse mortgage loan must be repaid when the homeowner sells the home, no longer uses it as their primary residence, or passes away. Typically, the loan is repaid with funds from the sale of the home, with the homeowner and family retaining whatever remaining equity there is once the loan is repaid. If you wish to keep the property, the loan can be repaid any time using a traditional mortgage or other funds.
Many people fear they’ll face a large bill if the loan balance is more than the home’s value when their parents pass. Reverse mortgages carry what’s known as a non-recourse feature to prevent exactly this situation. No matter how large the loan balance, borrowers (or their heirs) will never have to pay more than the total debt or the appraised value of the home, whichever is less, when the home is sold.
Reverse mortgages have several built-in safety measures to help ensure borrowers are making wise choices:
- Financial assessment. Lenders are required to conduct a financial assessment to ensure the borrower has adequate cash flow to meet their loan obligations — such as keeping current with property taxes, insurance and maintenance — over the life of the loan.
- Mandatory loan counseling by an FHA-approved counselor. As part of the loan process, each potential borrower must meet with an independent counselor to objectively confirm that they understand the terms of the loan and the reverse mortgage process from start to finish.
- Non-recourse feature. As noted above, borrowers or their heirs will never owe more than the home is worth when the home is sold to repay the loan.
- Borrowing limits. To help their home equity last as long as possible, borrowers who choose a Home Equity Conversion Mortgage (HECM) reverse mortgage are limited in the amount of funds they can access at closing and during the first 12 months of the loan.
It’s all about understanding your options
Reverse mortgages are certainly not for every borrower. But if your parents meet the eligibility requirements, it’s worth considering as part of a smart retirement strategy.
A great place to start is Reverse Mortgage Funding LLC (RMF), one of the nation’s leading reverse mortgage lenders. RMF offers a wide range of loan options to suit the diverse needs of older homeowners and homebuyers. As a direct lender, RMF also has certain pricing advantages, and can pass the savings along to its borrowers.
RMF welcomes the opportunity to educate homeowners and their families about the reverse mortgage process — a local, experienced reverse mortgage specialist can even come to your home (or another location of your choice) to confer with your family at your convenience. To learn more, call (888) 277-1567 to set up a convenient appointment.
SEE WHAT FUNDS YOU MAY HAVE AVAILABLE
If you have equity in your home and believe you meet the eligibility requirements, a HECM may be the option that could help you retire smart.
This content is sponsored by RMF, one of the nation’s leading reverse mortgage lenders. We are dedicated to helping older Americans live the retirement lifestyles that they imagined and deserve, in the comfort of their own homes. As a result of our commitment to providing an extraordinary and positive customer experience, we have earned a 98% customer satisfaction rating; a 5-star / Excellent score on Trustpilot; 4.8 out of 5 stars on LendingTree; and an A+ rating with the Better Business Bureau. Call (888) 277-1567 to speak with one of our experienced reverse mortgage specialists to learn about our retirement financing products and solutions.
*Source: National Reverse Mortgage Lenders Association (NRMLA)/RiskSpan Reverse Mortgage Market Index, Q3 2018, December 18, 2018.