What to Know About Your Parent’s Reverse Mortgage
Life has a way of catching up with us. It was just yesterday when you were playing catch with your dad, but now they are getting older and this means that time is coming to talk about their plans for financial independence.
Increasingly, this conversation centers around one thing – the reverse mortgage. So, if your family is like millions of families in Michigan and elsewhere, then here is what to know about your parent’s reverse mortgage.
Starting the Conversation
When it comes to the finances of elderly parents, one of the hardest things to do is to start the conversation. This makes sense as your parents have more than 40-years’ experience managing their personal finances.
However, the extensive experience does not mean a conversation about money should be ignored. Instead, the conversation is a must have, with the trick being to make your parents feel like they are in control.
In terms of getting started, one thing to remember is that your parents might not feel comfortable having this discussion. While the reasons for this vary, one reason why your parents might feel reticent is that having a conversation about their finances is akin to an admission that they are no longer driving the train when it comes to their own lives.
It is even harder when the conversation centers on leveraging the home they live in to provide an adequate source of finance for their future. Part of the reason is that discussing a reverse mortgage is in some ways an admission that your parents haven’t fully prepared for a long retirement.
As such, you should expect that your parents will be reluctant – at least in the beginning. This means that you need to find a way to break the ice around the conversation. Some ways are to discuss your fears about paying for your kid’s college education or even your own retirement.
Another way is to ask your parents what they want you to do in case they have an emergency. This can be an incredibly powerful approach as the costs of healthcare in the U.S. tends to be something that strikes fear into the hearts of everyone.
Some Key Facts
If you don’t know, a reverse mortgage is a type of loan for homeowners over the age of 62. While is a loan and the proceeds will need to be repaid, the payments occur when the home is sold or when the owner no longer lives there. This is the reverse part of a reverse mortgage and you can find out about the calculations behind a reverse mortgage here: https://reverse.mortgage/calculator.
People tend to use the funds from reverse mortgages to either pay down their debts, cover medical expenses, or to set up an additional source of capital to cover unexpected expenses during retirement.
One advantage to this approach is that your parents can tap into the equity they’ve built up in their home without the potential tax implications of a major cash advance. In addition, if your parents were to choose a line of credit reverse mortgage rather than a lump sum payment, then they could continue to benefit from appreciation in the value of the home.
Beyond this, you should also help your parent look at the budgeting implications of a reverse mortgage. Yes, there are no monthly payments tied to a reverse mortgage; however, your parents will need to make sure they can cover the closing costs tied to the loan. In addition, keeping the loan in good standing means keeping up with property tax payments, utilities, and maintaining the condition of the home.
In terms of ownership, your parents will continue to own the home if they take out a reverse mortgage. However, the lender will place a lien on the property and it is this lien that will need to be paid off when ownership is transferred.
Additionally, most reverse mortgages are non-recourse, this means that if the balance due is more than the home is worth that the banks can’t go after the estate or its heirs to collect payment. However, you don’t want to take this granted and should check the fine print in any agreement before the loan is closed.
During this review, it is important that your parents get legal advice. Now, reverse mortgages are quite common and there are many reputable lenders in this space. But given the nature of this transaction, it is important that your parents have their own representation in these proceedings.
Beyond this, it is a statutory requirement that reverse mortgages have a three-day right of rescission. This can allow your parents to void the loan – though they will have to return any funds received – for up to 72-hours after closing.