Your parents are nearing their retirement, or maybe they’ve recently retired from full time employment. It’s common for American families to feel concerned and challenged when preparing for retirement. It is especially important to have open conversations about plans for their future, both their own existing plans and how your role and theirs’ may change in the years to come. Traditionally, pension plans and employee-sponsored retirement plans provided for comfortable retirement years and financial planning options like a reverse mortgage weren’t a big part of the conversation. With the decline of traditional pensions, many people leaving the workforce today are doing so without a strong financial safety net. Unforeseen medical expenses, home maintenance, and even slow changes in the cost of living can cause uncertainty about how long retirement savings might last. A 2013 Merrill Lynch[1] survey sites finances as the biggest worry of healthy seniors concerned about whether they could afford longevity. Their number two worry was being a burden. Despite these fears, many retiring couples have a major financial resource they may not have considered – their home.
There are important potential benefits to a reverse mortgage for parents who are concerned with burdening their adult children or other family members. It can be a viable option to either increase cash flow, or to provide a credit line that can be used in an emergency or other sudden expense. Changes in insurance coverage, for example, or accessibility and convenience upgrades to your parents’ existing home. Even minor surgeries and illnesses require greater care and time for recovery as parents age, and short or long term at-home care expenses become quickly expensive. Having a stable line of credit for these common occurrences means retired couples may not have to dip into personal retirement or family savings to take care of extra bills.
A reverse mortgage enables the borrower to receive cash flow from the home equity he or she has—essentially a mortgage “in reverse.” They are most often in the form of a HECM (Home Equity Conversion Mortgage) and are insured by the Federal Housing Administration. The borrower can choose to receive loan proceeds via initial “lump-sum” draw, monthly or term payments, or can access the home equity via a HECM line of credit.
Your parents must be at least 62 years old to qualify, must live in the home as a primary residence, and must own their home outright or have a substantial amount of home equity. Just like in a “forward” mortgage, the lender conducts a financial assessment to determine whether the borrower meets income and credit standards for the loan. Most borrowers must also attend reverse mortgage counseling, and it is encouraged for adult children to attend as well. The borrower must continue to pay property taxes, maintain the home, pay their homeowners’ insurance policy and any homeowner fees. Failure to adhere to these terms can result in the loan coming due, at which point it needs to be repaid. As long as the terms of the loan are met, the loan is due when the borrower passes away or moves from the home permanently.
Many adult children wonder if a reverse mortgage impacts their parents’ home inheritance. How will this financial option affect you once your parents are gone? If the borrower has passed away when the loan balance comes due, the heirs are responsible for repaying the loan, usually by selling the home. With HECM reverse mortgages, when the property is sold neither the borrower nor the borrower’s heirs (you) will ever have to repay more than what the home is worth at the time of sale. This is an important feature to note! However, if you the borrower’s heirs would like to keep the home once the borrower passes away, you can choose to pay off the loan balance using other funds and keep the home.
A reverse mortgage may not be right for every household, but it is a tool that can provide significant benefits and reduce the financial fears of retirement. Reverse mortgages have recently gained acclaim among several renowned financial planning professionals including those at Texas Tech University, The American College, and MIT. These financial planners have shown through their research that households are better off financially when they have a reverse mortgage[2]. Whether you or your parents are concerned about how long retirement savings can last or what you can do to make plan for surprise costs and emergency cash flow, a reverse mortgage is something to factor in to helping your parents plan their retirement.
[1] Merrill Lynch, Age Wave “Finances in Retirement: New Challenges, New Solutions,” A Merrill Lynch Retirement Study, conducted in partnership with Age Wave 2017.
[2]Phau, Wade D. Ph.D., CFA. Professor of Retirement Income at The American College, 2015. Journal of Financial Planning, Financial Planning Association. “Incorporating Home Equity into a Retirement Income Strategy.” https://www.onefpa.org/journal/Pages/APR16-Incorporating-Home-Equity-into-a-Retirement-Income-Strategy.aspx (Assessed 5/24/17).
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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