As you are aware, reverse mortgages are a popular option for seniors to tap into the equity they have built up in their homes. While these loans have been around since the 1960’s many people don’t know much about reverse mortgages and this makes having a conversation with your parents difficult. In this article, we want to review what reverse mortgages are and how to talk to your parents about one.
First, what is a reverse mortgage? As mentioned, these programs have been around since the 1960’s. In fact, the first-ever reverse mortgage was written in Portland, Maine. However, these loans are not for everyone. To apply for a reverse mortgage a borrower must be 62 years old. In addition, a borrower must own their own home and have a low mortgage balance as a portion of the funds from a reverse mortgage must be used to pay off the outstanding amount due on any existing loans.
Why are they called reverse mortgages? Part of the reason is that these mortgages have no monthly payments. To keep the loan current a borrower only needs to pay the property taxes, utilities, and insurance on the property in question. However, these loans are not for second homes or vacation properties as a borrower can only get a reverse mortgage on their primary residence.
Once an obscure financial planning tool, reverse mortgages have become more popular in recent years. Some of the drivers behind the spike in interest include the unique structure of reverse mortgages which help borrowers to reduce their monthly expenses and even bolster their fixed income by tapping into the cash reserve they have built up in their house.
These loans are non-recourse loans, so even as the interest accrues over time the bank can only collect payment from the proceeds when the house is sold. This is good news for families of parents who take out reverse mortgages as it means the bank cannot attach a lien on the entire estate.
This brief description should give you a better understanding of a reverse mortgage and how it works. If your parents are considering such a mortgage, then you should research the topic in more detail to make sure it is the best solution based on their situation. As such, you want to know how this lender will help your parents and this means finding out more about their programs including government-insured reverse mortgages.
Next, you want to make sure that you and, more importantly, that your parents understand the process. 70 is the new 50, and most parents are fiercely independent. But you owe it to your parents to make sure they have a clear understanding of what a reverse mortgage is, how it works, and what it means for their situation. Whilst reverse mortgages have become more popular, they are not for everyone and it is important that prospective borrowers and their families understand the pro and cons of such a mortgage based on their specific set of circumstances.
Two of the biggest questions which come up when looking at reverse mortgages are closing costs and how the funds will be distributed. Bear in mind the closing costs for a reverse mortgage tend to be higher than traditional loans. This is largely due to the underwriting process and the documents which need to be filed at closing. However, there is also a three-day right of rescission, which means if your parents change their mind they can void the mortgage even after closing.
The other question regards how funds will be disbursed. This is determined by what is called the initial principal limit and in most cases, a borrower can only withdraw 60% of this limit in the first-year of a reverse mortgage.
Another thing to know about government-insured reverse mortgages is that all borrowers are required to have a discussion with a certified counselor. This reason for this step is to ensure that the borrower truly understands how a reverse mortgage works. Think of this as the tests before you get your driver’s license and if the counselor is not satisfied with a borrower’s understanding of the process, then they can recommend that the borrower is not approved for the loan.
Remember, getting a reverse mortgage is a big step and talking to your parents about this process can be tricky at times. Arm yourself with the facts about the process and make sure you they clearly understand process and then try to act as an advocate for your parents.