Reverse mortgages sound like a godsend for older folks who need cash. But if your mom and dad are considering one, pay attention.
Seniors who qualify can “reverse” their mortgage and withdraw a wad of home equity in the form of a loan—as a lump sum, monthly payouts, a line of credit.
They no longer make monthly mortgage payments, but they essentially surrender the rights to their home.
Pros and cons
Weird? Yes. But for some people it makes sense. Some pros:
- People can withdraw up to $625,000 tax-free in home equity without taking out a home-equity loan (which requires monthly payments)—or selling the home, which means moving out.
- If your folks get, say, $100,000 from their reverse mortgage, but after they die the house sells for $200,000, the bank gets $100,000 and the heirs get the rest.
- If the market dips, and the loan ends up being more than the home is worth—that’s the bank’s problem. Your folks owe nothing.
Reverse mortgages are expensive and it’s not easy to qualify. Typically, the fees and closing costs eat a chunk of the homeowner’s equity. When your folks die or move out, the home is sold to pay off the reverse mortgage.
Reverse mortgages can have enormous financial ramifications for your parents’ financial plans—and maybe your own. Read more at ReverseMortgageGuides.org.