Is a reverse mortgage OK for your parents?
When Jane Blume saw that her mother was running out of money, she was worried. Her mother, then in her mid-90s and still living in her Brooklyn co-op, was having difficulty paying bills. Her only sources of income were Social Security and rapidly-dwindling savings.
"She had outlived her savings," says Blume, who lives in Albuquerque, New Mexico. "So I suggested a reverse mortgage."
After working the phones, Blume found a bank that specialized in reverse mortgages, and a representative visited her mother. "During the initial presentation, she didn't accept it right away," remembers Blume. "She resisted, resisted, resisted. She had a lot to fear."
Getting past the reverse mortgage stigma
If you raise the idea of a reverse mortgage with your parents, expect resistance. They may be afraid that they'll lose their home or can't pass along an inheritance to you.
"Older Americans born in the pre-war era have a stigma about reverse mortgages," says Eric Declercq, national retail leader for reverse mortgages at MetLife. "They didn't want to strip their equity."
But when money got even tighter, Jane's mother finally relented and signed up for a reverse mortgage.
Suspect money troubles? Start the conversation
Talking about a parent's finances is never easy, especially if you're not sure how big the problem is. There are usually red flags that alert you to trouble ahead. For instance:
- You may know that your parent has limited assets.
- You may be aware that your parent is reliant on Social Security.
- Your parent may be racking up significant healthcare costs.
These are all tip-offs that open the door to financial discussions.
"Find the right time to talk to a parent," says Declercq. "Look at the quality of their lives. How are they living? Are their cupboards full? What's their health like?"
That's the entry point for brainstorming alternatives, adds Eric Tyson, co-author of "Mortgages for Dummies." The first question for a parent is: Do you want to keep living in your own home? "If so, then take an inventory of their financial situation," says Tyson. "There may be assets someplace else, such as real estate that isn't generating a lot of money."
Helping mom or dad research reverse mortgages
If, after this inventory, you feel that a reverse mortgage is an option that your parent should consider, what are some ways to smooth the process?
- Opt for free federal counseling: Your parent is entitled to free federal counseling when investigating a reverse mortgage. You can get the list of HUD-approved counselors from your reverse mortgage lender. "This counseling is required," adds Declercq. "It's robust and includes different types of reverse mortgages. But it's not financial planning."
- Tap into resources on your own: "Research and understand," says Declercq. "It's imperative that adult children understand how reverse mortgages work. Online resources--such as calculators, reverse mortgage explanations and frequently asked questions--abound. AARP also offers research tools that can help answer weighty financial questions. "Which reverse mortgage is right?" says Declercq. "Is it the right time? Do the benefits outweigh the costs?"
- Shop around: Get proposals from several different institutions, suggests Tyson, adding that the process can take a few months. Fortunately, there are four to five different reverse mortgage options, says Declercq. Also, fees, which are one of the biggest downside to reverse mortgages, have decreased, spurred by HUD fee cuts. "HUD has eliminated its 2 percent upfront charge," says Declercq, who adds that MetLife has also eliminated its origination and service fees. "Now reverse mortgages are no more expensive than conventional ones."
- Talk to a financial advisor early in the process: He or she can help you and your parent plot out long-term scenarios and protect as much as possible against future shortfalls. What are your parents' current assets? How much equity do they have in their home? What are the appropriate uses of reverse mortgage proceeds? With these answers, a reverse mortgage can fit snugly into a total financial plan. "You can take term payments or 10-year payments up to the amount you want to leave the estate," says Declercq. "This plan can become a life plan."
Your parents shouldn't worry about tax liabilities on the income, though property taxes must still be paid. Any remaining equity left after a home is sold--minus interest and fees--passes on to heirs. Even if the home sells for less than the reverse mortgage, the loss isn't passed on.
Reverse mortgages not a cure-all
Of course, a reverse mortgage is no cure-all. Your parent may still outlive the proceeds. That happened to Jane Blume's mother, now 101. Her $240,000 reverse mortgage payment was used to pay medical bills.
"Now, we're providing financial support," says Blume. "But I think we got a good deal for what she needed at the time."