Deciding On a Reverse Mortgage

Q: My parents are over 70, live in Virginia, are retired and own their home.
 

They are interested in a reverse mortgage to supplement their retirement. Is this a good idea? What questions should they ask and what should they be aware of?

A: Your parents sound like they might benefit from getting a reverse mortgage. To qualify, you must be over the age of 62 and your home must be mortgage free (or virtually mortgage free).

A reverse mortgage works like a conventional mortgage in that the house is used to secure the loan. Your parents would get the cash either in a lump sum or in monthly installments. But unlike a conventional loan, your parents would pay nothing back until the house is sold.

A tiny percentage of home loans are reverse mortgages. Many lenders have never done one. And there’s the rub. It’s easy to work with a mortgage lender who claims to have experience in this area but in reality doesn’t do many reverse mortgages at all.

Your parents should work with an experienced lender who can help walk them through the process with a minimum of confusion. HUD has a link on its website (www.hud.gov) of reverse mortgage lenders who are approved. You can find more information, plus links to qualified lenders, at Fannie Mae's website, www.fanniemae.com.

There's also great information at www.reverse.org and www.aarp.org. I have loads of information up on my own website as well. Use the search engine at www.thinkglink.com to pull down articles that can help.

The best questions to ask revolve around price: how much will the loan cost? How much cash can I get from my house? And, how much equity will be left after 5, 10 or 15 years?

A good reverse mortgage lender will be able to talk to you about how much these loans cost. There is a fairly steep upfront cost (but limited to no more than 2 percent of the loan amount), and if your parents only keep the loan for a couple of years, the effective annual percentage rate (APR) on the loan will be high.

Inheritance is another big worry. While your parents may not be concerned with leaving behind an estate, many families do worry that they will have nothing to leave to their heirs. The best part about a reverse mortgage is that the property continues to be owned by your parents, and they will benefit from any price appreciation in the neighborhood.

The paperwork can be complicated, so they may wish to review it with their attorney before signing. And, it would probably be a good idea if you were involved in the process, to make sure they’re asking all their questions and getting answers they can understand.

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