Many baby boomers face the challenge of simultaneously trying to help out their children financially and their aging parents. Many baby boomers are having to helping their aging parents with monthly expenses.
Fortunately this older generation of Americans has wealth in the form of home equity. Unfortunately, few in this generation are aware of the benefit of a reverse mortgage. If your parents are struggling to meet monthly expenses or health expenses, a reverse mortgage may help. Here are some facts and suggestions for talking to your parents about a reverse mortgage.
Explain the program
Your parents may not be familiar with the program. The first thing you want to do is explain what a reverse mortgage is. So what is a reverse mortgage? A Reverse Mortgage is a financial tool that allows people over 62 who own their homes to access the equity they have built up in their homes. The money pays off your current mortgage (if you have one) and any remaining money can be used for anything.
Reverse Mortgage Facts and Fictions
Next you’ll want to dispel some misconceptions about reverse mortgages. There are many misconceptions about reverse mortgages. Addressing them will help your parents understand the risks and benefits.
One of the biggest reverse mortgage misconceptions is that the bank owns the home. That is simply untrue. The title of the home will still be in your parents’ name*; the bank won’t own it.
Another common misconception about reverse mortgages is that you may end up owing more than the home is worth. A reverse mortgage is known as a “non-recourse” loan, which means that the lender cannot demand a larger amount than the value of the home at the time of disposition. In fact, most family members can purchase the property from the lender for the current loan balance or 95% of the current appraised value—whichever is less.
Here are some additional facts:
- A reverse mortgage does not affect your parents’ Social Security or Medicare benefits**. It can affect SSI or Medicaid under some circumstances, but not Social Security or Medicare.
- Your parents can still leave their home to you or to anyone they choose to.
- Your parents can receive payment in a lump sum, monthly cash payments, a line of credit or a combination.
Let other family members know the conversation is happening. Letting family members know that your parents need some financial help will help avoid hard feelings down the road and also and give you the opportunity to answer questions that they may also have about the reverse mortgage.
Tips to handle the conversation
Money and finances can be a touchy subject, and your parents might not be open to talking about it. Remember to be positive and avoid forcing the conversation. Be encouraging with the dialogue; inform your parents how a reverse mortgage is a good option to help secure their home for the rest of their life. A reverse mortgage can give them the additional funds they need to pay monthly bills, use for medical expenses or any other money needs they may have. Explain all the steps of the process to help ease their concerns.
Get a professional involved
If your parents are still hesitant about getting a reverse mortgage you could discuss their options with a financial advisor. In fact, one of the steps in the reverse mortgage process is counseling. In counseling, a counselor, who works for a non-profit counseling agency will describe in detail your parents’ options. Having a counselor describe the program will help them understand the risks and benefits.
Know your options
There are two kinds of reverse mortgage: the reverse mortgage fixed and the reverse mortgage line of credit.
The reverse mortgage fixed rate option is designed for people requiring a greater amount of money available to them to pay for mandatory obligations like their current mortgage balance, property liens, repair requirements and reverse mortgage loan closing costs. With this option the funds will be received in one lump sum at closing and the low fixed rate remains the same through the life of the loan.
The other option is the reverse mortgage line of credit. This option offers lower closing costs by limiting your initial money disbursement for the first year based on the FHA pre-determined limit. Other options to receive the proceeds are smaller amounts monthly, a full draw on your line of credit at closing, accessing your line of credit when you need or any combination of these.
Depending on what your parents’ financial situation is will determine which program will work best for your parents.
A reverse mortgage is a financial tool that can help your aging parent live a better life. If you are worried about your parents’ finances or are afraid they do not have enough cash flow to pay for their monthly bills, a reverse mortgage could be the answer.
*You remain responsible for counseling costs, taxes, insurance, and maintenance expenses.
**May affect SSI or Medicaid. Please consult with your financial advisor.