Your parent's reverse mortgage can become a family responsibility
How your parents' reverse mortgage can impact you
- Interest and insurance adds up over time, decreasing home equity.
- You may have to sell the house to pay back your parents' reverse mortgage.
- The reverse mortgage comes due if your parents move into long-term care.
A home equity conversion mortgage (HECM), the reverse mortgage insured by the Federal Housing Agency (FHA), can help your parents remain in their home throughout their retirement years by freeing them from mortgage payments and providing extra income for paying bills or dealing with emergency expenses.
This freedom comes at the expense of the home equity they have built up over years of paying down their mortgage, however. More importantly, the reverse mortgage will need to be paid off completely after your parents pass away or move out of the house, so you may have to sell the family home just to pay the loan.
Understand what happens to your parents' home when their reverse mortgage loan comes due:
Decreased home equity
The big impact of a reverse mortgage on heirs comes from the reduced equity of the parents' home. Your parents are borrowing money against the value of the house. In addition, loan interest and mortgage-insurance payments keep adding to the loan amount as long as your parents receive payments from the reverse mortgage. Over time, this can eat up a large chunk of the value of the house, which translates to a smaller inheritance from the sale of the house. This is a tradeoff many adult children are willing make to help their elderly parents enjoy their retirement years without having to move out of their house.
May need to sell the house
A reverse mortgage must be paid off once the last borrower passes away or moves out of the house, so you may have to sell your parents' house just to pay off the loan. With a HECM loan, you will get six months to retire the loan, and you can get up to six more months through extensions. So, if you want to keep your parent's house, you can use other sources such as life insurance, or even apply for a new home loan, to pay off the reverse mortgage. Interest and insurance payments will continue to accrue until you pay off the loan, however, so the longer you wait, the higher the payoff will get.
While you may have to sell your parents' home, with a HECM loan you can never owe more than the house is worth.Your liability is limited to 95 percent of the appraised market value of the home at the time the payoff is due. So, if your parents owe more on their HECM than the home is worth, you are not liable for the entire amount, only what you can get from selling it. If you don't want the hassle of selling the house to pay off the loan, you can simply sign what is called a deed-in-lieu of foreclosure and hand the keys to the lender. You can remove your parents' belongings and furniture, but permanent fixtures must stay with the house.
Permanent residence rule
HECM reverse mortgages also become due if your parents ever move out of the house. One of the rules is that HECM loans last only as long as at least one borrower continues to live in the home. Generally, this is not a problem. If your parents decide to move, they will sell the house and pay off the loan. But what happens if a surviving parent moves into assisted living or must go to hospice. If the last borrower on the loan spends more than 12 months living outside the home, the loan will need to be repaid. This may force you to sell the house even before your both of your parents pass away.
Private lenders also offer reverse mortgages. The private loans are not covered by the same rules set in place for HECM loans, so contact the lender and read the loan documentation to determine your obligations and liability for paying off the mortgage.