Reverse mortgage and your adult children
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You're thinking about getting a reverse mortgage. Should you discuss your plan with your adult children? Maybe. Every senior homeowner's situation is unique.
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"I wish I could give you one best practice that's optimal for every family, but it's more complex than that," says Joseph Goetz, an associate professor for the department of financial planning, housing and consumer economics at the University of Georgia and an editorial board member of the Financial Therapy Association.
A type of home equity loan that is available to homeowners age 62 or older. No repayment is required until the borrower dies or moves out. At that time, the principal and accumulated interest are repaid, usually by selling the house. Most reverse mortgages are insured by the Federal Housing Administration, which calls the loan a home equity conversion mortgage, or HECM (pronounced HECK'm).
As a general rule, Goetz says, more communication is better, but family dynamics and the family's financial culture are important, too.
"In some families," he says, "the kids would be really upset if Mom and Dad gave up the house without talking to them. In other families, they would not."
A reverse mortgage doesn't necessarily involve giving up your house -- at least, not as long as you live there. But Goetz's point is well-made: Many adult children have an emotional attachment to their childhood home or expect to receive their parent's home free of any encumbrance upon the parent's death.
Death: A bad time to surprise the kids
A reverse mortgage discovered after the fact can come as a surprise, shock or disappointment, suggests Buz Livingston, a financial planner for Livingston Financial Planning in Santa Rosa Beach, Florida.
He recalls 1 client whose father and stepmother took out a reverse mortgage without their daughter's knowledge. Another client's parents took out a reverse mortgage and informed 1 sibling but not the other.
"The children need to be involved just to make sure everybody is on the same page and there is not a big surprise," Livingston says. "Just keep it simple. Say, 'This is what we are going to do and if this (house) is something you want to hold on to, speak up.'"
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You can inform without seeking advice
Whoever will be responsible for your estate should be aware of your reverse mortgage and the options to repay it, says Cara Pierce, a financial specialist at ClearPoint Credit Counseling Solutions in Fresno, California. Many times, that executor or administrator will be one of your adult children.
"It doesn't mean you have to get them involved or take their advice," Pierce says. "But if I am setting up my son to be trustee, it would be nice if I told him that if I stay (in my house) until I die, he needs to make sure to pay off the loan on my behalf."
What triggers the loan repayment?
Heirs aren't personally responsible for the debt, but the house will have to be sold to repay the reverse mortgage unless there are other ready funds, retirement savings or life insurance, or the adult child can qualify for a new mortgage.
Disclosure also matters because if you move out of your home for an extended period, the reverse mortgage likely will have to be repaid, which could trigger the sale of the house if there aren't other assets to pay it.
"It has to be your primary residence," Livingston explains. "If you are living in a nursing home, it's not your primary residence and the bill comes due."
The talk isn't just about money
The conversation, if you decide to have one, should be aligned with your goals, which might include a desire to address your adult children's emotional concerns, expectations or sibling rivalries, Goetz suggests.
"If one of the parents' goals is their adult children's happiness or to leave a bequest for their children, a financial planner will say, 'You need to bring your kids into the conversation because that's consistent with your goals.' Another set of parents could say, 'My kids are doing fine. It's my business, and my kids won't feel any adverse emotional reaction to not knowing I took a reverse mortgage.' In that case, you don't need to tell your kids," he says.
When to talk about it
The house itself or your broader financial planning agenda could be entry points to start the talk with your adult children.
Another option would be to include your adult children in the financial counseling that's required for some types of reverse mortgages. Pierce says a lot of housing counseling is done over the phone and adult children can participate in the call.
Livingston says he's "not anti-reverse mortgages," but he also says you should speak with your adult children before you get one.
"I always make a point of hammering pretty hard to my clients that they really need to talk to kids about it," he says. "It's important to have that discussion."