“In addition to helping with monthly cash flow issues, some people using reverse mortgages to help one spouse qualify for Medicaid assistance with nursing home bills while letting the co-borrower spouse remain in the home and get a monthly check.”
If your parents are considering a reverse mortgage, they must know the advantages and disadvantages of these financial devices. There are risks involved, but if they know what they are doing, a reverse mortgage can be beneficial. Here are tips on how to determine whether a reverse mortgage is right for your aging parents.
Reverse Mortgages 101
A reverse mortgage (also called a home equity conversion mortgage) is a loan that provides your parents with a check every month. When they die or move out of the house, the bank will call the loan for repayment. The heirs can then either sell the house to repay the loan or pay off the loan to keep the house.
A variation on this basic theme is if your parents select a line of credit option instead of monthly checks. They would only tap into the reverse mortgage line of credit when they needed or wanted to, which would likely result in a smaller amount that the estate would have to repay to the bank.
The traditional reverse mortgage is typically used when a senior needs money to pay monthly living expenses and bills. The line of credit option is often used by aging adults who want to pay off a large debt, such as a medical expense, or pay for an occasional expense (as opposed to monthly bills), such as travel.
What You Do Not Know Can Hurt You
Unfortunately, some people have a bad experience with reverse mortgages because they or their loved ones are blind-sided with unexpected consequences. Here are things you must know about reverse mortgages:
- Reverse mortgages affect everyone who lives in the house. If you move out of the house or die, everyone else has to move out of the house, too, unless they can afford to pay off the loan. You can avoid this result to a certain extent, if your spouse is a co-borrower on the loan. At least she can stay in the house, if you are no longer there.
- Using reverse mortgage proceeds for investment can be a bad gamble. If you withdraw a large amount from your reverse mortgage to invest in the stock market, hoping to make enough money to pay your loan interest and have money left over, you can lose money. This will decrease your equity in your home. To compound the problem, whatever money you made in the stock market will be taxable, even though it was less than the loan interest.
- Reverse mortgages come with high fees. If you are planning to use a reverse mortgage just to make ends meet for a few years, you may lose $5,000 to $10,000 of your home’s equity in up-front fees. You should explore other options, such as a standard home loan or home equity line of credit, or sell the home and move to more affordable housing.
Advantages of a Reverse Mortgage
If you are drowning in debt and struggling to make the monthly payments, a reverse mortgage might be a good solution for you. If the loan pays off your debts and you can then maintain your home and pay the property taxes and homeowner’s insurance, you may enjoy life more and sleep better at night. Know of the downsides discussed above, and the fact that every dollar you take out of your home’s equity is a dollar you cannot give to your children or others through inheritance one day.
Besides helping with monthly cash flow issues, some people are using reverse mortgages to help one spouse qualify for Medicaid assistance with nursing home bills, while letting the co-borrower spouse remain in the home and get a monthly check. This arrangement can be tricky, but if done correctly, both spouses can benefit.
Every state has different laws, and this posting discusses the general law. Talk with a local elder law attorney to comply with your state’s laws.
Reverse Mortgage Alert. “Is a Reverse Mortgage a Good or Bad Idea? Positives & Downsides Compared.” (accessed November 16, 2017) https://reversemortgagealert.org/pros-and-cons/
CNBC. “Rethinking reverse mortgages: Bad move or bright idea?” (accessed November 16, 2017) http://www.cnbc.com/2015/04/01/rethinking-reverse-mortgages-bad-move-or-bright-idea.html
- S. News & World Report. “6 Drawbacks of Reverse Mortgages.” (accessed November 16, 2017) https://money.usnews.com/money/personal-finance/banking-credit/articles/2017-06-16/6-drawbacks-of-reverse-mortgages