Is a Reverse Mortgage Right for Your Parents?

Reverse mortgages have grown in popularity, but the risks are still there.  

On the former sitcom, The Golden Girls, four women made ends meet in their retirement years by sharing a home. Unfortunately, that solution won't work for everyone-particularly for your parents, who may have to move in with you.  

Many retirees have spent the last several months watching their wealth dry up due to a combination of low interest rates and high inflation. If your parents are in this situation, you may be inclined to encourage a reverse mortgage-especially if it keeps them from moving into your place. But you should understand that these are complex and expensive lending products that aren't right for everyone.

Back to basics

Only available to homeowners aged 62 and over, the reverse mortgage addresses households that have equity but no cash on which to live. It's a loan made against the homeowner's equity and funded by way of a lump sum payment or available credit line. No repayments are required, but the entire balance becomes due and payable once the homeowner moves or passes away.

FHA-backed reverse mortgages are called Home Equity Conversion Loans, or HECMs. As with other types of federally-backed mortgages, HECM loans are subject to a maximum of $625,000. Retirees who have more equity could obtain larger reverse mortgages through private programs, but these are likely to be expensive.   

A price to pay

Reverse mortgages are one of the most expensive means of tapping home equity. Borrowers have to plan for origination fees of up to $6,000 plus closing costs, application and service fees, and mortgage insurance premiums. Since reverse mortgage borrowers are generally short on cash, the lender may offer to take the fees out of the funded amount. This means that the borrower will be paying interest on those fees from day one, which can add up to a small fortune over time.   

Another consideration is the lender's right to demand repayment. Typically, a reverse mortgage is due and payable if the home is sold, or if the borrower no longer lives there full-time. The lender may also call the loan if the home suffers considerable damage, say from a hurricane, which the borrower can't afford to repair.

Finally, some unscrupulous lenders may pressure the borrower to direct the loan money into expensive financial products, such as annuities. This is generally a bad idea, because the loan fees combined with the annuity fees eat up way too much of the borrower's wealth.

Alternate options

Your folks may choose to avoid the costly fees and finance charges by selling their home and buying something smaller. Or they might benefit from simply retaining the services of an experienced financial planner who can assuage (or confirm) their fears of running out of money. Another option is to follow the ways of The Golden Girls and find a few trustworthy roommates who can help pay the bills.