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).
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:
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:
(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.)
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:
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.
On the other hand, there are substantial issues and risks involved with reverse mortgages.
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:
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.