With today’s post, I want to look at reverse mortgages from another perspective, or should I say another’s perspective. In other words, I want to examine the role that one plays as a son/daughter in this process. Given that all reverse mortgages (by virtue of the age 62+ requirement) are taken out by older people, and that the burden of taking care of the elderly will increasingly fall on younger generations, I think this is an important issue.

If one of your parents is examining the possibility of taking out a reverse mortgage (or even if the idea is yours), the first step is to sit down with your parents and try to completely understand their financial situation. Ideally, all children and close family members should be involved in the discussion. As part of this conversation, you need to undertake a basic audit of your parents’ finances. What kind of revenue do they have (social security, income, pension, etc.), what are their basic (i.e. cost of living) expenses, and what are their assets and liabilities? After taking account their age and health, you should have a rough idea as to the financial shape they are in.

It is also important to try to understand their expectations. Do they desire to live affluently or simply? Are there are big purchases that they expect to make; will they be doing a lot of traveling? Do they expect to move into an independent or assisted living facility, or would they prefer to remain completely independent for as long as possible. Its your responsibility first to try to understand their expectations, and then after taking account of their financial position, to manage them. If you see a big gap between their expectations and financial reality, then they will obviously require some form of support.

Obviously, the most basic way of supporting them would be for you and your siblings to simply mail them a check every month. If this is unrealistic and/or inadequate, then you will need to think more creatively. The next best alternative would be to formally loan money to your parents. Rather than having them pay you back while they are alive (which would defeat the purpose of loaning to them), it would be understood that the loan would be repaid from their estate, after they pass away. While it is understandable that you would feel guilty about loaning money to your own parents, consider that (assuming you can afford it) it is a solution that benefits everyone, and just like with a reverse mortgage, they shouldn’t have to worry about repaying the loan, since such will be taken care of post-mortem.

You should also consider buying their house outright from them. In this way, both of you can avoid all transaction costs, they can continue to reside in the home for as long as they please, and in the process, they secure plenty of cash to support themselves into retirement. This is an especially good solution if the home is still mortgaged, since they can kill two birds with one stone. It also solves the problem that is posed when one spouse is of qualifying age for the reverse mortgage, and the other isn’t. In such situations, some will go ahead foolishly and obtain a reverse mortgage anyway, only to have one of the parents kicked out of the house when the other one dies, and the loan becomes due.

The final option is to go ahead and help your parent(s) obtain a reverse mortgage. Because of high fees and the accumulation of interest, this is often the least economical option, and I recommend it only as a last resort, to be used when all other options have been exhausted. If your parents are obtaining the reverse mortgage so that they can (continue to) live affluently, perhaps you can recommend an alternative, such as downsizing into a smaller house and/or tweaking their standard of living. This would also be a good time to re-suggest loaning them money yourself, which would serve the same function but would better preserve your inheritance. Speaking of which, this is an important consideration, and one that should be reflected in your parents’ plans.

A final note: when helping your parents to obtain a reverse mortgage, you must make sure that the decision has been made by them and that they fully understand its implications. Even if they are elderly, they must undergo counseling and sign the paperwork themselves. There have been a few recent cases in which adult children fraudulently used their parents’ names to obtain reverse mortgages for themselves, and were later discovered. Lenders and regulators are now on the lookout, and it’s important that the loan is of your parents’ own volition.

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