With your parents well into their retirement and living independently on their own, a primary concern may be if they have a safe and affordable home to live in for years to come. If they own their own home, they may very well be sitting on a lot of equity—especially if their mortgage is completely paid off or very close to being paid off. A popular financing alternative is a reverse mortgage. It’s a type of cash-out option for seniors who need money, but still want to live in their home. There are many risks but also benefits to selecting a reverse mortgage route. Here are just a few things to consider as you help your parents make the right choice for their lifestyle.
How Does A Reverse Mortgage Work?
You may be asking yourself, what is a reverse mortgage? A reverse mortgage is also referred to as an HECM or home equity conversion mortgage. It focuses on allowing older homeowners—typically over the age of 62, to cash out any equity in the home and use the money for whatever is needed. Once the process is complete, the homeowner can then decide to get a lump sum of money or payments over the course of several years. Homeowners can choose to use the money for:
- *Paying off medical bills or accumulated debt.
- *Remodeling or improving their home.
- *Vacationing or buying a second home.
- *Having instant access to retirement money.
If your parents are cash-strapped and their home mortgage is paid off, this may be a good option for them. A mortgage broker will have the home appraised with the help of a Home Valuation Appraisal company and decide how much equity is in the home based on the appraisal value, condition, and location. After fees and taxes are taken out, the remaining difference will be available to the homeowner for cash accessibility.
What Is Needed To Qualify?
In order to qualify for a reverse mortgage, a homeowner must:
- *Be over a specific age—this varies per contract but generally 62 or older.
- *Must have sufficient equity in the home to cover fees and total borrowing costs.
- *The current mortgage should be paid off from the original bank or close to be being paid off.
- * Be able to prove that they can pay the property taxes and insurance on the home.
- *Prove that the home is their existing and future primary residence.
If you feel that your parents may qualify for a reverse mortgage, call a reputable mortgage broker right away to initiate the process. From there, have all of the documents thoroughly inspected by a private attorney’s office to sift through errors or possible discrepancies. This is also a good time to address the change in the will or estate regarding final fund distribution.
Understanding The Stipulations
Are parents suddenly facing an unforeseen money crisis? A reverse mortgage loan can be a lifesaver to get out of a sticky financial bind. Helping them understand what the loan’s stipulations are is important. Some basic things to go over include:
- *They can’t move out of the home without forfeiting the terms and agreements of the new reverse mortgage.
- *There must not be any other liens or debts on the property.
- *They have to be the only ones on the mortgage.
- *Your parents must be able to afford future repairs and provide routine maintenance to the property
- *They won’t be able to take out an additional mortgage on the property.
Considering all of these factors is vital before making a final decision about an HECM.
How Does This Affect Inheritance?
A major drawback for you as a child of a parent who holds a reverse mortgage is that it’s very likely you won’t be able to inherit your parent’s home when they die. Having a reverse mortgage doesn’t mean that the home belongs to the bank or mortgage company completely, but it will hold a lien for the amount borrowed on the title. This means that when your parents pass away, the home will then be sold by the mortgage company to pay off the equity that was used at closing. The mortgage company will release any difference in funds to the beneficiary listed on the mortgage or a will.
Sitting down and discussing your parent’s financial future is important. Deciding if a reverse mortgage is right for them takes understanding all of the facts before moving forward.
