As parents age, it sometimes falls to their adult children to help them make ends meet. If Social Security isn't enough or your parents' investments take a hit in a bad economy, helping Mom and Dad might start straining your own budget. A reverse mortgage might begin to sound like a good idea, but as with almost any financial fix, there are pros and cons.
Cashing in Equity
A reverse mortgage offers cash for the equity in their homes to homeowners age 62 and older. They can take it in a lump sum, in monthly payments, as a line of credit, or they can mix and match these options. The loan doesn't come due until one of them no longer lives in the home. How much of a reverse mortgage your parents can take depends on their ages, the available equity in their home and the interest rate. If the value of your parents' home skyrockets after they take out the reverse mortgage, the loan balance doesn't increase just because there's more equity available.
If your parents have $60,000 in equity in their home, they won't receive $60,000 from a reverse mortgage. Closing costs – including interest on the loan, private mortgage insurance, and all the traditional costs of closing – are due in advance. Therefore, when your parents take out a reverse mortgage, they actually give up some of their equity to cover these costs.
A reverse mortgage isn't a cure-all for the monthly bills associated with your parents' home. They must still keep current with taxes, maintenance, repairs, and regular homeowners insurance in addition to the mortgage insurance required by most reverse mortgage lenders. In theory, the proceeds from a reverse mortgage can satisfy these expenses. In actuality, if the money is depleted for other bills or for some other purpose, these expenses remain due and owing and they can prompt a foreclosure action if they're left unpaid. Foreclosure brings the reverse mortgage balance due immediately.
Another tricky issue is that one of your parents must reside in the home during the term of the reverse mortgage. If your parent is a widow or widower and must enter a nursing home, the lender can call the mortgage due and demand repayment of the reverse mortgage balance. Additionally, funding a nursing home might become a problem. Although rules can vary from state to state, Medicaid doesn't typically count home equity in a parent's assets, so it can't bar him from eligibility. However, the cash proceeds of a reverse mortgage would typically be an asset that could tip the scales and prevent eligibility. You also can't count on inheriting your parent's home if a reverse mortgage is in place. Your parent's death will force its sale. You'd have to pay it off yourself or liquidate other assets from the estate to keep it.
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