April 10, 2014
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Adult children have reason to be wary when their parents start talking about reverse mortgages. The loans make sense only for those who plan to stay in their homes for the rest of their lives and can afford to pay property taxes and insurance for that long.
But elder law and reverse mortgage experts say they frequently encounter resistance from children less concerned about the terms of the loan than about losing their presumed inheritance.
“If heirs are all concerned about their inheritance, but don’t want to go into their own pockets to help out Mom and Dad, it’s really a Catch 22,” said Matthew Murphy, the president of Reverses Are Us in Hauppauge, N.Y.
Federally insured reverse mortgages, issued under the Home Equity Conversion Mortgage program, are a way for homeowners 62 and older to borrow money using their home equity as collateral. Interest and insurance are charged throughout the life of the loan, and the total becomes due when a borrower dies.
The loans can be costly, but they are sometimes the only option for older homeowners who are cash-poor and facing high health care costs. Their use is expected to rise as baby boomers age. In 2013, half of all Medicare beneficiaries had savings below $61,400, according toa recent Kaiser Family Foundation report.
When the entire family is involved in the discussion about whether to take a reverse mortgage, sometimes the children understand their parents need the equity, while other times, they are openly opposed, said James A. Robbins, an elder law lawyer in New York. The duty of the lawyer representing the parents, he said, is to advise them as to what’s in their best interests, not the best interests of their children.
Parents may decide not to disclose that they’re borrowing against the family home to avoid conflict or because they view it as their personal business. “Sometimes they’ll say, we don’t need to tell anybody about anything,” Mr. Murphy said.
A lack of communication can lead to a rude awakening for adult children who still live at home and don’t realize what a reverse mortgage will mean after their parents die, said Deborah S. Ball, an elder law lawyer in New York. To continue living there, “that child’s going to have to buy the house,” she said. “And that almost never happens.”
More typically, the heirs either sell the house, or if the mortgage balance exceeds the home value, deed it over to the lender in lieu of foreclosure. Heirs are not responsible for any debt beyond 95 percent of the value of the house.
Frank Melia, a mortgage planning specialist with United Northern Mortgage Bankers in Levittown, N.Y., says that since the recession, the adult children he meets with have been a little more open to discussion about their parents borrowing against their equity. But during better times, “it would come up a lot,” he said. “ ‘You’re spending my inheritance.’ ”
The clients he deals with are often reeling from unmanageable health care costs. “They’re basically telling the children, we have to do this,” Mr. Melia said. Mr. Murphy says he tries to educate adult children about the terms of reverse mortgages. “Sometimes there’s just no getting through to them,” he said, “because they’re just being selfish about their inheritance possibility.”
Once fully informed, the children may be more supportive of their parents’ decision. Ms. Ball tells of a wife and ailing husband who took out the largest reverse mortgage they could qualify for so they could renovate their home to accommodate a live-in caregiver. Their children had no objections at all. And “when the children are not a factor,” she said, “it’s a beautiful thing.”
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