A growing number of seniors are using reverse mortgages to age in place. If your parents are looking into obtaining one, there are some things you should make sure they understand.
The most popular reverse mortgage product in the marketplace is the Home Equity Conversion Mortgage (HECM), which is available to homeowners who are at least 62 years of age. The HECM is insured by the Federal Housing Administration (FHA), and as a result, it provides benefits not found in any other reverse mortgage products.
When talking with your parents about this option, make sure they understand a few important things before they obtain the loan.
How Much Money Will They Receive?
The amount that borrowers receive varies depending on the age of the youngest borrower, current interest rates, the amount of equity that’s available in the home, and the lesser of the home value, sale price or maximum lending limit.
There are several different types of HECM products. These include the Standard, the Saver, and the Purchase. Each has qualities that can be beneficial to a prospective borrower’s particular situation.
- HECM Standard: Higher fees, allows borrowers obtain more in proceeds
- HECM Saver: Lower fees, borrowers receive less in proceeds
- HECM for Purchase: Use the loan to purchase a home
Why is Counseling Required?
If your parents are considering a reverse mortgage, the federal government requires them to undergo reverse mortgage counseling with an approved Department of Housing and Urban Development agency.
During the meeting, the counselor will explain how the reverse mortgage product works, and will review the options that might be available to them. The counseling sessions also allow prospective borrowers to raise any questions they have about the different types of HECM products.
What Happens When My Parents Pass Away?
Regardless of the type of loan your parents choose, a topic that often gets raised during family discussions is what happens to the house when the borrowers move or pass away.
Reverse mortgages become due and payable once the borrower(s) are no longer living in the home. If your parents leave their house to you as an inheritance, you will be responsible for repaying the loan in full.
In most cases, a borrower’s estate allows the home to be sold in order to repay the lender. The estate gets to keep any remaining proceeds of the home sale, if they choose to pay the loan back by selling the house.
Some adult children choose to pay off the loan in order to prevent selling the house. In this situation, the full amount of the loan has to be repaid even if the balance of the loan is higher than the value of the house. However, if the heirs decide to sell the house to repay the loan, the HECM product has a non-recourse policy which states that your heirs will not be required to pay more than the value of the home, even if the loan balance exceeds the value of the home.
If only one of your parents is on the title of the home, or does not meet the age requirement of the loan, keep in mind that the reverse mortgage will not transfer automatically to a surviving, non-borrowing spouse, in the event the borrower passes away or moves.
The same is true for adult children who may be living with their parents. Once the reverse mortgage borrower(s) no longer live in the home, the loan becomes due and payable.
Reverse Mortgages: A Family Decision
These are all important things your parents and your family should understand before they take out a reverse mortgage.
Make sure your parents are comfortable with the loan and understand what will happen if they pass away unexpectedly. A well-informed discussion about how a reverse mortgage might benefit your parents is an important part of the reverse mortgage process.
If you find yourself with any remaining questions regarding what your parents should know about the HECM product, we’re here to help.