Reverse Mortgages for Your Aging Parents – Pros and Cons

Reverse mortgages, often called Home Equity Conversion Mortgages (HECMs) are, essentially, a special type of home loan for people over the age of 62. Such reverse mortgages allow you to take some of the equity in your home and use it as another loan to cover expenses for medical care, vacations, home repairs, or other expenses. Your home acts as the collateral.

As you consider whether or not a HECM would be right for your elderly parents, it’s a good idea to weigh the pros and cons.

Pros

1. There is no need to repay a HECM until the borrowers are no longer living in the home as their primary residence, or if they default on the original mortgage. In other words, as long as your parents keep living in their home, they do not have to repay the loan.

2. HECM money can be used to purchase another home or property.

3. Reverse mortgage “income” is not usually taxable.

4. You may be able to avoid selling your home if you get a reverse mortgage.

5. Your parents can choose how they receive the loan money, such as in the form of monthly payments, as a lump sum, etc.

6. There is no additional monthly payment as there is in a refinance or traditional loan.

7. Your parents will still own their home.

8. If your parents live long enough that they receive loan payments over and beyond the value of their home, they will still never owe more than their home’s value.

9. There is not usually an income requirement.

10. Your parents can live in a nursing home or hospital if necessary for up to 12 months before the loan will be due.

Cons

1. The loan must be repaid upon the death of the borrowers (your parents).

2. The value of your parents’ home will be significantly reduced if they take out a reverse mortgage.

3. Up-front costs, such as closing fees, can be significant (often higher than regular mortgage loans). These fees are taken out of your parents’ home equity, and lenders sometimes neglect to inform borrowers of this.

4. Your parents will still be responsible for real estate taxes, homeowner’s insurance, mortgage insurance, and some other expenses.

5. The burden is on you and/or other surviving family to pay back the loan in the event of your parents’ death.

6. Medicaid eligibility may be negatively affected if your parents take out a HECM.

7. The interest on the HECM is not tax-deductible as it is with a regular mortgage.

8. The interest rate is usually variable, and the interest accumulates and increases as the balance increases.

9. There are fewer resources to leave to heirs as equity is used up.

10. If your parents can’t pay expenses associated with the HECM, such as maintenance fees and taxes, then the loan may become due immediately.