A reverse mortgage is a loan against equity in your home. You borrow against this equity.
You must continue to pay property taxes and fire insurance, but you live rent-free in your home. The amount of the loan is determined by your life expectancy.
The lender gets your home at the death of the surviving spouse.
Not many Americans who own their homes have taken out a reverse mortgage: under 3%.
The advantage of a reverse mortgage is obvious: you get money for living expenses. The disadvantage is that you leave nothing to your heirs. For most Americans at the time of death, their main asset is the equity in their homes.
The plight of retirees is this: the equity in their homes has shrunk by a third or more since 2007. At the same time, they are living longer. They have not saved. Their monthly expenses are rising. They have no pension. They live on Social Security.
None of this is new. Parents have become dependent on their children from the beginning of humanity. Pensions are new. Government medical insurance is new.
The problem is this: tens of millions of retirees did not plan to move in with their children in old age. They want their independence. But they run out of money. Then they are tempted to take out a reverse mortgage.
Before doing this, a parent should discuss this with the heirs. Who is willing to chip in today in order to inherit the parents’ home? If no one chimes in, then it is time to consider taking out a reverse mortgage.
Be sure you have a written budget before you do this. People who have no budget will be tempted to burn through the money fast. Then what? No money, no equity, and disinherited children.
Children who expect to inherit a house had better initiate a discussion of all this soon. Parents may take out a reverse mortgage without telling the children.