How do we decide between a reverse mortgage for my father or a personal loan from me?
My father is considering a reverse mortgage to help with monthly expenses, but, as his daughter, I'm concerned about losing equity in our family home. I'm considering offering him a personal loan of about $50,000 so that he won't take this step. What should we consider before conducting this type of transaction within the family?
Expert Answer
Loans between family members are always fraught with potential complications, and your case is no exception. There are a number of issues to consider, but they all boil down to one big issue: What would be the impact of this type of loan on you and your family?
First, let's focus on your situation. Can you afford to be without $50,000 for the balance of your father's lifetime? Will you charge your father interest on the loan? If not, you'll be giving up any earnings you could have had on that money during the period your father has use of the funds. Also, what if the $50,000 runs out and your father needs additional money? Are you prepared to loan him more? You need to be able to answer these questions yourself before you make any offer to your father.
If you choose to loan the money to your father, be sure to fully document the agreement in writing. Loaning him money may complicate your relationship, as well as your relationship with any siblings you may have. In fact, it would be a good idea to thoroughly discuss the idea with your siblings first to make sure that everyone is on board -- or at least aware of the new financial relationship. For example, if you have any brothers or sisters, they may also be beneficiaries in your father's will. Will you expect to receive repayment of the loan from your father's estate, prior to sharing the inheritance?
It may also be worthwhile to give a reverse mortgage a second look. It's true that your father's equity in his home will be decreased by the principal of the loan, along with the closing costs that are rolled into the total amount of the loan. But as long as your father stays in the house, if the value of his home increases, so will his remaining equity. And when your father either sells the house or passes away, you and your siblings will have the opportunity to pay off the amount of the reverse mortgage and assume ownership of the house.