There are so many misconceptions about reverse mortgages that we’re starting to sound like a broken record. But it doesn’t matter because when it comes to setting the record straight, we’re in this for the long haul. We’ve seen how our products can change people’s lives for the better, and we are fully committed to helping more people find joy in their retirement.
Today, we’re going to tackle a really big home equity myth: how a reverse mortgage affects your children.
❓How many of you would agree with this statement: “When it comes to my kids, there’s nothing I wouldn’t do.”
There are probably very few of you who would disagree. So you can imagine the fear people experience when they hear that a reverse mortgage would rob their kids of their inheritance, leave them empty-handed and homeless, and, in some cases, trap them with their parents’ debt.
Using a Reverse to Ensure Your Legacy
While no one is entitled to an inheritance, many parents want to leave their children something when they pass. A 2015 HSBC survey found that American retirees expect to leave an average inheritance of almost $177,000 to their heirs.
Depending on your financial situation, sometimes the only thing a parent can leave for their child is the house. In other scenarios, parents can leverage their home equity to leave their child more assets—like FAR customer, Steven, who used a reverse mortgage to buy his children houses of their own.
There are three scenarios in which you can use a reverse mortgage to pass something onto your children. To help explain the different scenarios, we reached out to our VP of Retirement Strategies, Steve Resch.
Scenario one: A smart retirement plan
If you use your home equity is part of a well-rounded retirement plan that can help your interest-earning assets continue to grow over time.
In Steve’s experience as a financial advisor, he says that it’s not uncommon that adult children would prefer to inherit money over a house. If this is true for your kids, you can use your home equity to ensure that invested assets continue to grow and leave them a bigger nest egg.
Steve explains further, “For example, if a client passes away and they have an estate worth $1.2 million and only $300,000 of it is in home equity, they now have $900,000 in invested assets they can pass onto their children. In this situation, we’ve used the home equity to help ensure that the invested assets will be there and continue and grow. And the overall net benefit to the heirs is greater than if the home equity wasn’t used at all.”
Rather than drawing down your interest-earning assets, you can leverage your home equity and allow your tax-deferred funds to grow and compound and leave more to your children. Steve explains further, “As a financial advisor, I am always looking to help ensure that our clients have a legacy and that they have a safe income in their retirement plan. And using home equity to help ensure those two things often means a greater legacy for the clients and their heirs rather than if we didn’t bring home equity into the planning process at all.”
Scenario two: Planning-based
If your home is one of your primary assets, and you don’t want to leave it to your children, but you would like to leave some of your remaining equity.
In this scenario, your house is one of your biggest assets. You decide to tap into your home equity for additional retirement income, and you want to leave some of the leftover equity to your children, but not the house itself.
It’s important to know that reverse mortgages are non-recourse loans, and there is insurance that protects heirs from owing more than the value of that property, which allows for some equity to be leftover after the house is sold.
Steve explains, “HUD is the insurer of the FHA loans. And HUD sets the principal limit factors and they set the insurance premiums on these loans with the intention that the borrower and their heirs will have remaining equity at the end of the loan term. And so, they set those principal limit factors and mortgage insurance premiums to help ensure that there will be equity leftover at the end of the loan term.”
Once the loan term has come to an end, the heirs can obtain any remaining equity after the house has been sold.
Scenario three: Need-based
If you need to tap into your home equity for income supplementation, but you want to leave your children the house.
In this scenario, you want to leave your children the house, but your home is one of your only assets, and you need to take out a reverse mortgage to help supplement your lifestyle and living expenses during retirement. In this case, you would need to involve your children in the conversation as they would need to have a clear understanding of how they will receive the house following your passing.
Steve explains, “Basically, the parents need money. Their home is their only asset. Do the children want to give the parents the money every month (that they would get with a reverse mortgage) just to inherit the home free and clear? That’s an option. But if it’s not an option and generally when you present this to the children, they’ll say, “No. We want mom and dad to take what they need. They’ve worked hard. This is their money. Let them do what they need to do.”
When faced with deciding whether to see their parents flourish in retirement or not, most children would choose the former. More often than not, your kids would rather have you take what you need through a reverse mortgage.
The Reframe: How A Reverse Can Help Your Children
Even with these scenarios to consider, you may still be feeling what psychologists call “parental guilt” about making a major life and financial decision that may not give your children everything you ever hoped to give them.
Taking care of your own needs in retirement is not selfish. There’s a false dichotomy in the idea that you’re either helping your kids or you’re being selfish. You can do things to help you and still do things for your family.
Having more independence as you grow older is a way of helping your children. Further, being financially independent during your elder years can alleviate any potential financial burden on your children.
Your kids will be OK
You’ve worked hard your whole life to arrive at your retirement. You should be asking yourself: what do I want to do with these precious years? How can I live my best life right now? How do I want to age? All of these questions are important for you to consider in your retirement.
You’ve gotten them this far, so it’s important to remind yourself that your kids will be OK.
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.