If you are deciding whether a reverse mortgage is the right move for you, it’s important to have an honest conversation with your adult children if they are still living at home. Ultimately, it is your decision to get a reverse mortgage, but informing them on the product can help eliminate any miscommunication and conflict down the road.
Explain the basics
First, informing your children on what a reverse mortgage is all about is vital. A common misconception among many people is that in a reverse mortgage transaction, the bank takes ownership of the borrower’s home. This is not true. The borrower maintains ownership throughout the course of the loan, which typically becomes due and payable when he or she moves or passes away.
Reader tip: if you’re new to reverse mortgages start here with some basics.
Next, talk to your kids about what people actually use reverse mortgages for. Explain that the payments from the loan could help to cover the costs of things that your retirement savings and finances may not be able to cover such as home renovations or medical care. You may be less of a financial burden on your kids due to the reverse mortgage. Many adult children are relieved to hear this. Also share that you won’t have to pay back the loan until you either pass away or move out of the house permanently.
Explain the basics of what your responsibilities will still be in terms of loan obligations. Even though you will not be responsible for making a monthly mortgage payment with a reverse mortgage, this does not mean all other payments go away. You are still responsible for keeping up on property taxes and insurance on the home and ensuring the property is kept in good condition.
Share their role
Adult children are often skeptical of their parents taking out a reverse mortgage because they fear that when they pass away, they will have to pay back the loan. This is another misconception.
Explain to your kids that a reverse mortgage is a non-recourse loan. This means that no matter how large the loan balance gets; they will never have to pay back more than the appraised value of the home at the time of sale.
If the loan balance is higher than the appraised value of the home, then the Federal Housing Administration (FHA) insurance fund absorbs that loss. This is one of the benefits of FHA insurance, which is a requirement of all Home Equity Conversion Mortgage reverse mortgages. So share with your kids that if you pass away, they can use the value of the home to pay back the loan, but they won’t go into debt over it.
In fact, if the loan balance is less than the value of the home, share with your kids that they will be able to keep the difference as inheritance, if you choose to name them as your heirs. This is a very possible outcome if you live in an area with high home appreciation because the value of your home could go up over the years.
It is also extremely important to explain non borrowing spouse rules of the loan to your adult children, if you are married. This can give your children peace of mind knowing the protections available for spouses of reverse mortgage borrowers.
Bringing this topic up may not be the easiest, so try to start off by talking about your broader financial planning agenda. You could even include your adult kids in the reverse mortgage counseling that’s required for all borrowers. This counseling can take place over the phone, which can make it easier for adult children to be included.
If you would like to learn more about how to talk to your adult kids who still live at home about a reverse mortgage and speak to your trusted adviser.