What About the Kids?

Over many years I have interviewed hundreds of seniors to determine together whether a HECM loan is appropriate and whether it is possible.  A significant percentage of these older homeowners ask that question….”what about the kids”? Their concern, of course, is one of legacy. They want to leave something for their heirs.  Many HECM borrowers have had the discussion with their adult kids (I am often present for these family sessions) and have dispelled the idea that they are “robbing” the inheritance. How?

First, when the subject is aired in the light and not kept in the dark, a heartwarming  reaction often occurs. The fear that parents or grandparents had is shown to be unfounded!  My experience is that most adult children want the best for their parents and grandparents. The attitude is “you’ve done so much for us, please enjoy your retirement. We’re fine.”  Of course not all families enjoy this Ozzie and Harriet scenario (younger readers google that!)

When there is pushback (and I’ve seen it to the point of vitriol and abuse!), it is usually because of misinformation and myths.  Chief among those myths is that after the homeowner/s are gone then the bank owns the house. Utter nonsense! This is just like any other mortgage (except heirs are protected by FHA insurance!) But that misguided perception can drive a completely unnecessary resentment.  Don’t try to explain the HECM program yourself. Invite me to the conversation. You will get honesty and facts.

Another concern is the erosion of equity that usually does occur.  By design, the reverse mortgage balance grows over time unless borrowers choose to pay the charges each month.  For some those payments may make sense but not for most. So the amount to pay off at the end (death, sale, or whatever event triggers the payoff) is going to be higher than the original amount borrowed.  I always tell people that the bank is going to get paid, they just don’t know when. But often family members assume that there will be nothing left for them (if I have managed to convince them the home is still in the estate and not owned by the bank).  This could happen but it is rare. Along with the rising reverse mortgage loan balance there is almost always property appreciation. Especially in the DC, MD and VA area where we are blessed with average annual appreciation that significantly offsets the rising loan balance.  And because the HECM program is dedicated to the well-being of older Americans (literally a protected class), we do not loan 80 or 90 or 100% of the home’s value. Right off the bat a HECM borrower’s equity is at least 50%.

Here is perhaps the most critical aspect to the question “what about the kids?”  Mom or Dad or both or Grandma and Grandpa or both are going to have a cost of living.  In fact, as we age, the cost of living often goes up. Usually for medical reasons. Or maybe because a caretaker outside the medical realm is required.  Of course income is almost always down. Unless we mimic the practice of more primitive cultures and ignore the needs of the elderly, casting them out to die, those needs are going to be met somehow.

So where are the assets needed to sustain a dignified life for seniors going to come from?  Some homeowners (very few indeed!) have done well and prepared well for retirement. They have assets with a financial planner and depend on that to fund their retirement.  Without even considering the vagaries of the markets, even “safe” markets such as bonds, the rare retirees that depend on accumulated money are in the dissipation or distribution phase.  Will it last or will they outlive it?  And “what about the kids?” Is the dissipation of assets not “robbing” them of their inheritance just like possible declining home equity?

Another solution to assets needed to sustain a decent life as we age is the children themselves.  If there is reluctance to use housing wealth and as in 80% or more of elderly households there are no assets to distribute, the adult children may bear the brunt of the parents’ or grandparents’ cost of living.  Now there’s direct “robbery” indeed. As I said, most adult children and their families do not consider that using home equity, dissipating savings or getting family assistance to be “robbery”! My strong belief in the good in people grows when I watch the dynamics of families dealing with funding the retirement of loved ones.  Just another reason why I have the best job in the world!

Please bring me into the conversation.  I will lay out an amortization schedule to help predict the outcome of a reverse mortgage under different scenarios.  Make an informed decision as to where the cost of living is going to come from. I may or may not recommend a reverse mortgage.  I do promise honesty and facts.