21 Aug Should my mom take out a reverse mortgage?

Q. My mother is in her 90s. She still lives in her own home which she owns outright, no mortgage. She asked me if she should look into a reverse mortgage. She doesn’t need the money. I am her sole heir and she doesn’t want to burden me with trying to sell the house when she dies. The house may only be worth about $100,000. She would prefer that the house be “pre-sold” and pass on to the reverse mortgage holder after her death. Does this sound right? What are we missing?
— Trying to learn

A. If your mom does not need the money, then a reverse mortgage is probably not for her.

As for wanting to reduce your burden if something was to happen to her, a reverse mortgage wouldn’t do that, either.

A reverse mortgage is a loan to the owner, said Patricia Daquila, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

“The amount of the loan is based on the owner’s equity in the home,” she said. “It is like an advance payment of the equity in their home.”

If she was to take out a reverse mortgage, Daquila said, your mom would keep the title of her home and the money she would receive is tax-free. She would not have to pay back the money as long as she lives in the home.

“However, when she either died, sold the home or moved out of the home, then she or the estate would repay the lender the balance of the loan,” she said. “It would still be her responsibility if she was alive, or the estate if she was deceased, to sell the home.”

There are many different types of reverse mortgages including single-purpose reverse mortgages, proprietary reverse mortgages and home equity conversion mortgages (HECMs) which are federally insured.

Daquila said a single-purpose reverse mortgage may be used for only one purpose as specified by the lender. A proprietary reverse mortgage is a private loan backed by the company that develops them. A home equity conversion mortgage (HECM) can be used for any purpose and are backed by the U.S. Department of Housing and Urban Development (HUD), she said.

There are a few other things to consider when deciding if a reverse mortgage is the right choice, Daquila said.

“There are fees and costs associated with a reverse mortgage such as closing costs and servicing fees,” she said. “Also, your mom or the estate would owe more than just the original loan amount over time with a reverse mortgage, since the interest on the loan gets added to the balance each month.”

In addition, the interest rate may change over the course of the loan depending on the terms of the reverse mortgage and the interest is not tax deductible each year, she said.

All that, and your mom would still have to qualify for the loan.

We recommend anyone considering a reverse mortgage speak to an independent financial advisor who can help determine if the loan is right for you.

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This story was originally published on Aug. 21, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.