Q: Should we let dad take out a reverse mortgage on his home, or give him a personal loan? Will he lose equity in the family home?
A: It depends on the situation. If the cash flow need is short-term in duration for your Dad, the personal loan may be the best way to go.
If there are other siblings involved in Dad's care, I would recommend that some type of informal loan agreement be drawn up and signed by all the family members involved. Keep this as a "business arrangement" so that there are no issues created down the road with family members should Dad pre-decease his repayment of the loan (i.e. how it may affect any inheritance).
If the cash flow need is longer in duration, the reverse mortgage may be the way to go; although it is expensive. The amount of cash received is based on age, current interest rates and the home's value (the value is subject to specific limits that change every January).
The owner typically does not have to pay anything back until they die, sell their home or permanently move out of your home. Whatever debt remains is paid back to the lender from the remaining sales proceeds.
To be eligible for most reverse mortgages, you must own your own home and be age 62 or older. In addition, the reverse mortgage must be a "first mortgage." This means this mortgage must be the primary debt against your home. Be sure that you research the types of mortgages available and secure it from a reliable lender; i.e. the HECM (Home Equity Conversion Mortgage) is the only reverse mortgage insured by the Federal Government.
Rosanne Rogé is a Certified Financial Planner, Certified Senior Advisor and Registered Financial Gerontologist who leads R.W. Rogé & Company, Inc.
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