Discussing Reverse Mortgage with Senior Parents
Many seniors today will have a greater part of their wealth placed in their home. The result of years of paying mortgage along with the continuous appreciation of real estate value means that their home equity has become a sizable resource they can tap into if necessary.
A reverse mortgage allows seniors who face difficulties in meeting their retirement needs to use their home equity as an additional source of funds. If you have senior parents who are struggling with their monthly expenses, suggesting a reverse mortgage to them may be a good solution.
Whether or not a reverse mortgage is appropriate for them or not depends entirely on their particular circumstances. What you can do is offer them sufficient education on this option by illustrating how it works, answering their questions, and pointing them to reliable sources of further information.
To help you discuss reverse mortgage with your senior parents, below are answers to questions that they’ll commonly ask:
What is a reverse mortgage?
A reverse mortgage is a loan that lets homeowners who are at least 62 years old turn a portion of their home equity into funds. It’s called a reverse mortgage because it reflects how normal mortgages work – this time the lender pays the borrower instead of the other way around.
What can we use reverse mortgage for?
Proceeds from a reverse mortgage can be used for anything – there are no restrictions on how you can spend it. Those who get a reverse mortgage typically use the funds:
- To cover daily living expenses
- To pay for health care or long term care costs
- To pay for home repairs and improvements
- To downsize into a new home that better suits their needs
- To pay for a child’s or grandchild’s education
- To have a line of credit for emergencies
How much can we get from a reverse mortgage?
In general, the older the homeowner is, the more funds they can get. The lender will calculate this amount depending on other factors such as the appraised market value of the home and the interest rate.
Note that borrowers can choose how they will receive these funds, either as a lump sum, a line of credit, in fixed monthly payments or in any combination of the above. For example, you can choose to receive a lump sum amount at the loan’s closing and then have the remainder in a line of credit you can use later on.
Will there be monthly payments?
There are no monthly payments required on a reverse mortgage. The loan will not need to be paid back for as long as you live in the home. It will only become due and payable if the home is sold or vacated, or when the owners pass away.
Normal monthly bills such as those from taxes and insurance must still be kept current.
What are the fees and other costs in getting a reverse mortgage?
Any loan fees charged by the lender to process the application can be paid out of the loan proceeds. The only out-of-pocket costs that the borrower will need to shoulder include the counseling fee and the home appraisal fee. Both together will amount to a few hundred dollars.
Will the bank or lender own our home?
The bank or lender will never own the home at any point. The borrower will always have the title to the home, and even when the last surviving spouse permanently leaves the property, the home will pass on to their heirs or estate.
What responsibilities do we have once we get a reverse mortgage?
Getting a reverse mortgage still entails a few responsibilities to avoid the loan becoming due and payable prematurely. It’s important to note first that one of the main requirements of getting approved for a reverse mortgage is that it must be the primary lien on the home. Any existing mortgage must be paid first, and this can be done with proceeds from the reverse mortgage.
Other responsibilities include:
- The home must remain the primary residence of the borrower, as it will be used as collateral for the loan.
- The home must pass and maintain HUD minimum standards. Repairs must be taken care of by the owners; however, initial repairs to get approved for a reverse mortgage can be paid through the proceeds.
- Real estate taxes, home insurance, community fees, building fees and similar homeowner bills must remain current to avoid default.
How do we pay off the reverse mortgage loan?
The reverse mortgage will only need to be paid back once the home is no longer the primary residence of the persons in the title. Once the loan becomes due and payable, the loan balance will equal the total amount borrowed, plus interest and mortgage insurance. This means the balance grows as the owners continue to live in the home, and they will owe more than the original amount.
The balance can be paid by selling the home or by paying through other resources. If the home is sold for an amount greater than the loan balance, the remainder will be given to the heirs or the estate.
Will our heirs inherit debt from our reverse mortgage?
The responsibility to settle the loan balance falls on the heirs or the estate if the homeowners pass away. However, the debt doesn’t actually transfer to them.
A reverse mortgage is a non-recourse loan, meaning no matter how large the loan balance gets, you will never owe more than the appraised value of the home. This means that if the home was sold for less than the loan balance, the federal government will absorb the difference using its insurance fund. On the other hand, if the home gets sold for more, the heirs receive the remainder.
How do we begin applying for a reverse mortgage?
The process begins by contacting a reverse mortgage lender. You can also speak with professionals who specialize in reverse mortgage information. They will then outline the next steps.
Next topic: Ways to Use a Reverse Mortgage Loan