Reverse Mortgage Loan Blog

A reverse mortgage is an appealing way to extract cash from your house — but it comes with baggage.

Reverse mortgages, which homeowners who are at least 62 years old can use to tap their home equity, have become more popular in recent years. The homeowner takes out a new loan on the house. The bank then gives the homeowner a lump sum, a line of credit or a regular monthly payment — almost like an annuity. The loan is repaid, with interest, when the borrower dies, moves or sells the house.

But there are significant drawbacks. The fees can run as much as 7% of the home’s value, compared with roughly 3% for a conventional loan. Lenders typically won’t allow homeowners to borrow against all of their equity. And in the end, if the loan isn’t paid back, the lender gets the home.

Families in which at least one adult child has amassed a nest egg have another option — buying the house outright, or using some of that money to set up a private reverse mortgage.

Even though it’s a family loan, you should still record it legally so other family members can’t attack the arrangement after your parents die, says Kenneth Kossoff, an estate-planning attorney in California. He also advises paying for a title search to make sure there are no other liens on the house before you make the loan. There also are tax considerations.

Could one of these deals blow up? Certainly. A child funding a reverse mortgage could lose his job and stop paying his parents. Another risk: Home values could fall further, meaning you lend your parents more than you can get in return for selling their house.

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