As well as having an effect on the reverse mortgage borrower, a reverse mortgage also affects the adult children of the borrower. If your parent is considering a reverse mortgage, you will likely want some clarity about your role in the process. I have provided some information below, but please contact me with any additional questions you may have.
Questions to Ponder
- Is there a concern from other siblings as to inheriting the home or the equity?
- Do I have the financial resources to help my parents with their medical and living expenses?
- What are my parents’ wishes as to staying home if medical care is needed for an extended time?
Common Concerns of Adult Children
Will Mom and Dad use up my inheritance? While tapping into their home's value, your parents’ home may appreciate in value, which could allow for some equity to be left at the end of the loan, but not always. It is possible for your parents to use up their home's remaining equity. Keep in mind that they could be able to live more comfortably without having to depend upon family members to support them.
Will the bank take their home? Your parents will continue to own and live in the home as long as they continue to meet the loan guidelines. However, they must keep their property taxes current, keep required homeowner’s insurance in force and the home in good repair. Failure to do these things could result in the loan being called due and payable. Just as a borrower with a traditional mortgage retains ownership, your parents will continue to own their home and retain title as long as they abide by the loan guidelines and requirements. As with any mortgage, a lien is placed on the subject property.
How much money will they owe when the loan has to be repaid? Your parents will owe the total amount borrowed (up to the value of the home), accrued mortgage insurance premiums, accumulated interest, servicing fees, and any other costs and fees financed through the loan amount.
How do my parents repay the loan? There are three viable options for your parents. They can sell their home to repay the lender and collect any leftover proceeds, choose to reimburse the lender directly from a personal account, or refinance the loan.
What happens to the equity if my parents or I decide to repay the loan by selling the house? There are two options. Either your parents or the heirs can keep the home and pay the balance due on the reverse mortgage, or they can decide to sell the home and use the proceeds to pay off the reverse mortgage. Either way, any remaining equity is retained by the owners or heirs.
What happens to my mom and dad’s house if they move into a senior care facility? A reverse mortgage becomes due and payable when the last borrower moves out of his or her home permanently. For instance, moving into a senior care facility, selling the home, passing away or moving in with the children.
What happens if the loan balance becomes greater than the value of the home? The Home Equity Conversion Mortgage (HECM) is a non-recourse loan, which means that the loan is only secured by the home and the property. As HECM borrowers, your parents pay a mortgage insurance premium to the U.S. Department of Housing and Urban Development (HUD). This insurance protects the borrower in that they will not be responsible for more than the value of their home when the loan becomes due and payable. Heirs wishing to retain the home after the loan becomes due may choose to pay the lesser of the (1) loan balance or, (2) 95% of the home's appraised value, less any closing costs and real estate commissions.
What are the risks my parents would be taking in receiving a reverse mortgage? A reverse mortgage typically doesn’t affect regular Social Security or Medicare benefits. To find out if it impacts other federal or state assistance or medical programs, contact your reverse mortgage lender, tax attorney, or counseling agency. A reverse mortgage loan is secured by a mortgage on the home and failure to comply with loan terms could result in foreclosure. All risks should be identified and discussed with your own attorney and/or financial advisor.
Are there restrictions on how my parents spend their money? Your parents can spend their money any way they choose. Borrowers have often used their reverse mortgage to pay off other debts, make home improvements, go on vacations, replace an aging vehicle, or eliminate an existing mortgage payment (the existing mortgage debt is refinanced into the reverse mortgage loan and your parents must continue paying their property taxes current, applicable HOA fees, and keep the home in good repair).
Is there any information that provides what all of the fees will be? The lender is required to provide your parents with the Total Annual Loan Cost, or “TALC” disclosure, which is required by the Federal Reserve Board. The TALC displays the total transaction costs over the projected life of the loan, which will allow your parents to see all costs related to the reverse mortgage.
*You cannot lose your home under normal circumstances and so long as you pay your property taxes, homeowner’s insurance, maintenance costs and otherwise comply with the loan terms.
**Consult your benefit agency.