Should my elderly parents get a reverse mortgage to help with my bills?
Before parents take out a reverse mortgage to help a child in debt, they should learn the pros and cons.
My parents are in their 80s and own their home outright. I recently lost my job and have lots of bills. Should they take out a reverse mortgage to help me out? What are the pros and cons in this situation?
It sounds like your parents could qualify for a reverse mortgage, but it may not be in their best interest to get one to help you out with your bills since reverse mortgages were not designed for this purpose.
The main reason that reverse mortgages were created was to provide a way for older homeowners to get the money they need to remain in their home. For example, reverse mortgage proceeds can be used to cover the costs of health care (such as hiring a home caregiver) or pay for home remodeling to make it easier for older homeowners to stay in the home (such as adding grab bars in the showers, adding a ramp to the front door, or installing a lift to a second floor).
Understanding Reverse Mortgages
First, let’s make sure you fully understand how reverse mortgages work. Reverse mortgages allow older homeowners to convert some of the equity in their home into cash. (Home equity is the difference between the value of the home and the amount owed on any mortgages.)
These types of loans are called “reverse” mortgages because the lender pays the homeowners, as opposed to a “forward” mortgage where the homeowners make payments to the lender. Payments are distributed to the homeowners in the form of a lump sum (subject to disbursement limits), monthly amounts or a line of credit (or a combination of these options). With a reverse mortgage, the homeowners’ equity in the property gets smaller over time, while the loan balance grows.
If your parents were to take out a reverse mortgage, the loan must be paid back when they:
- move out (permanently or, for example, to a nursing home for 12 or more months)
- sell the home, or
- fail to live up to the contractual requirements of the mortgage, such as remaining current with property taxes and insurance premiums. (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
Qualifying for a Reverse Mortgage
Generally, in order to qualify for a reverse mortgage (such as an FHA Home Equity Conversion Mortgage or "HECM," which is the most popular type of reverse mortgage on the market), homeowners must:
- be at least 62 years old
- live in the home as their principal residence
- own the home outright or have considerable equity in the home
- not be delinquent on any federal debt, and
- be able to continue to pay for ongoing property expenses (including property taxes, homeowners insurance, HOA fees, etc.).
(Learn more about Home Equity Conversion Mortgages from the Federal Housing Administration’s website at www.hud.gov. Run a search for “Home Equity Conversion Mortgage” or “HECM” to find links to informative articles and eligibility criteria.)
Pros and Cons
If your parents decide to take out an HECM reverse mortgage, they must participate in a consumer information session given by a HUD-approved counselor. The counselor will explain the pros and cons of a reverse mortgage and will likely cover the following:
Upside to a Reverse Mortgage
The big positive of a reverse mortgage is that your parents will never have to make monthly repayments. This means that if your parents want to help you out financially, but don’t have sufficient reserves available, a reverse mortgage could provide the funds to do so. Reverse mortgages are also relatively easy to qualify for because there is no minimum credit score and generally no income requirements.
Downsides to Taking Out a Reverse Mortgage
On the other hand, there are substantial issues and risks involved with reverse mortgages.
- If your parents take out a reverse mortgage and give those funds to you, they could run out of resources that they may need to cover their own expenses. For example, if your parents spend down the equity in the property, they will not be able to access it later on to cover costs for things such as their own long-term health care costs or to finance a move.
- Your parents could ultimately lose their home to foreclosure in certain circumstances. For example, if your parents can’t keep up with the property taxes and homeowners insurance, as well as maintain the property in reasonable condition, the reverse mortgage lender could foreclose. Also, if your parents need to move into an assisted care facility and cannot come back to the home for 12 months or more, this too could lead to a foreclosure. (Learn more in Nolo’s article Foreclosure of Reverse Mortgages.)
- It will cost your parents money to take out a reverse mortgage due to closing costs, interest, servicing fees, mortgage insurance, and other fees.
- If your parents are currently eligible for Medicaid or Supplementary Security Income (SSI), a reverse mortgage could affect that eligibility since recipients under those programs cannot have more than a certain amount of money in their checking account on a monthly basis.
Explore All Your Options
Reverse mortgages are complicated. Rather than encouraging your parents to take out a reverse mortgage to help you out, you should also consider other alternatives that are available to help with your bills, including:
- reducing your expenses
- obtaining a forbearance agreement from your lender to suspend your mortgage payments temporarily (if you own a home), or
- negotiating a payment plan with your creditors. (Learn more about dealing with creditors when you can't pay your bills and past due debt in Nolo’s article Dealing With Debt: An Overview of Your Options.)
More Information About Reverse Mortgages
Educate yourself about reverse mortgages, including the risks to older homeowners who take out this type of loan, at AARP’s website at www.aarp.org/revmort.