Should My Parents Get a Reverse Mortgage?

You are referred to as the “Sandwich Generation.” You’ve got kids in or heading for college as well as retired parents. Wherever you look, all you can see is additional expenses. In the rough economy of the past few years–with home values and retirement savings down, government benefit programs threatened and longer life expectancy–many children of seniors are concerned about their parents being able to finance the remainder of their lives, even if they have been diligent about retirement planning. Recent research conducted for NRMLA by Marttila Strategies shows that there is an emerging inter-generational consensus that your parents should spend whatever they have to live as well as they can for as long as they can.

The vast majority of America’s seniors have their wealth in their home equity. And if your parents are struggling to meet their month-to-month expenses or to pay for additional health expenses, tapping into that equity may be the best solution for all of you. A Reverse Mortgage is a financial product that allows them to do just that. Whether or not a reverse mortgage is the right financial option for your parents is a very personal decision and based on many factors. In most cases, your parents will discuss this option with you before making their decision. You want to be prepared to give them the best advice. Here are some questions you most likely will want answered:

What is a reverse mortgage?

A reverse mortgage is a loan available to people over 62 years of age that enables borrowers to convert part of the equity in their home into cash. The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed. Instead of making monthly mortgage payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower. (*)

For adjustable interest rate mortgages, the borrower can select one of the following payment plans:

• Tenure- Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term- Equal monthly payments for a fixed period of months selected.
• Line of Credit- Unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
• Modified Tenure- Combination of line of credit and scheduled monthly payments for as long as you remain in the home.
• Modified Term- Combination of line of credit plus monthly payments for a fixed period of months selected by the borrower. 
• Single Disbursement Lump Sum- A single lump sum disbursement at mortgage closing.
  • For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

What do people use reverse mortgages for?

Reverse mortgages were conceived as a means to help people in or near retirement who have limited income use the money they have put into their home to pay off debts their existing mortgages, cover basic monthly living expenses or pay for health care. There are no restrictions on how a borrower may use their reverse mortgage proceeds.

Will a reverse mortgage increase my parents’ monthly expenses?

No. Borrowers are not generally required to pay back the loan until the home is sold or otherwise vacated. As long as they live in the home, they are not required to make any monthly mortgage payments (*) toward the loan balance, but they must remain current on property tax, any home owner’s association dues, and insurance payments. For more details please click here.

If my parents take a reverse mortgage, does the bank then own their home?

No. With a reverse mortgage, the borrower always retains title and ownership of the home (**). The home will pass on to your heirs, but they must repay the loan. Just like a traditional mortgage, you are borrowing money and using your home as security for the loan. You must continue to pay for home maintenance, property taxes, any association dues, and homeowners insurance or the lender / FHA can foreclose on the home. Also, if you move out permanently, sell the home, or when the last borrower dies, you or your estate will need to repay the mortgage balance. The mortgage balance will include the amount you have received in cash, plus the interest, and any fees that have been added to the loan balance over time.

*Borrower(s) must continue to pay property taxes, homeowner’s insurance, and any association dues. Failure to pay taxes, insurance, dues, and failure to maintain the home could result in foreclosure. While you retain title and deed, your loan is secured by a lien.

**Loan is secured by a lien.