Different families have different parent-child relationship dynamics. Some parents don’t feel the need to inform their adult children about decisions that could impact their children in the future while others see to it that their children know all about their major decisions. What’s more, several others not only keep their adult children updated about their financial decisions; they also ask their children for input.
If you’re in the third group – meaning you’re being asked by your parents about certain housing and financial issues – you need to keep yourself well-informed.
One of the most often asked issues during retirement age is reverse mortgage. It’s even more so now that savings and retirement income are getting depleted faster than expected. Seniors also hear about it from advisors selling investment products that use reverse mortgage as a source fund or from friends that have already availed of it to pay certain debts or bills.
Your parents’ reverse mortgage can affect you even if you don’t need any inheritance from them to live comfortably. Depending on what option they choose for their reverse mortgage, they can exhaust all that can be extracted from this type of mortgage, and also exhaust all their other financial sources, and overwhelm you with financial problems when they need long-term care down the road. Of course, most parents don’t intentionally do this to their children. What they need is adequate information about reverse mortgage and their financial options as seniors.
According to many financial advisors, including the nonprofit AARP which serves Americans aged 50 and above, retirees or other older Americans should use reverse mortgage as a trump card – used only when there’s no other option left. They advise that seniors wait until their 70s and 80s, unless there’s real hardship that needs to be relieved.
Although reverse mortgage can provide substantial amounts of cash to older homeowners, there are minuses, such as:
- The closing costs are higher compared to those for other home loans. These costs include mortgage insurance, origination fees and third-party servicing fees.
- The total of the reverse mortgage loan amount increases every month with interest and other fees.
- The home must remain the principal residence of the borrowers. If your parents need to be in a nursing home later on and stay there permanently because of unforeseen circumstances, the reverse mortgage must be repaid.
There are also other factors that must be considered:
- Borrowers must continue paying residential real estate taxes, homeowners insurance premiums and utility bills.
- The home must be maintained so that it doesn’t lose value and cause losses to the lender.
- Heirs are left with less or nothing if the loan amount surpasses the value of the home.
What you can get from your parents may be the last thing you’re thinking of. You may even be thinking of gifting them with something. Nonetheless, one of the best things you can do is to help them with accurate reverse mortgage estimates and information so they can enjoy during their retirements years the fruits of their labors without causing you financial risks.