According to US News World and Report, over the last two decades, the cost to attend private national universities has jumped 134%, while in-state universities have seen a 174% increase. These skyrocketing prices have many families scrambling to figure out how to pay for their children’s education. Young people are often asked to shoulder a significant amount of the cost, meaning they graduate and enter the workforce in debt. Could funding education with a reverse mortgage offer the solution your family is looking for? The answer depends on a clear understanding of how these financial tools work and your financial situation.
How Can a Reverse Mortgage Help?
For people over 62 with substantial home equity, a reverse mortgage can offer an avenue to liquidate some of that equity without selling the home. As an alternative to a high-interest student loan that will require payments as soon as the student graduates, funding education with a reverse mortgage offers access to cash without the requirement of monthly loan payments when the student graduates from school.
Some potential benefits of using a reverse mortgage to cover or supplement the cost of education include the following:
- Helping a young person avoid starting out burdened by debt.
- Watching your legacy make a difference now (rather than including it in an inheritance you will not witness).
- Access to cash without required monthly payments.
- Helping your family without negatively impacting your own savings or retirement portfolio.
- For people with current conventional mortgages, removing monthly required mortgage payments has the added benefit of improving your monthly cash flow while you help a young person.
Impact on Your Financial Plan
Before making any commitments, assessing your long-term financial situation and needs is important. While it is a noble wish to extend the gift of education to someone you care about, it’s equally important that you don’t make that choice at the expense of your financial well-being.
Determining whether you will have enough money for long-term care, daily expenses, or emergencies can help you decide if funding education with a reverse mortgage is possible and how much you can contribute. If you do not have a solid retirement plan, a financial advisor can help you make long-term projections and assess your financial situation. Be sure to choose a financial advisor who is not attached to a lending institution or receiving commissions on the sale of products to advise you.
Payout Options Allow for Different Strategies
A reverse mortgage offers borrowers different payout options, including a lump sum, monthly installments, a line of credit, or a combination of the three. This feature allows borrowers to tailor payouts to their financial situation and the student’s needs.
Deciding which payout option works best for you will be determined by multiple factors that should be determined in advance, such as how you will assist and how much you can offer. Will you cover the full tuition and leave the student to provide their room and board? Or perhaps you will help a student who has just graduated make payments on their loans.
For some situations, a single lump sum payout covering the full promised amount, or paying back existing student loans, may make the most sense. Alternatively, people who can’t cover the entire cost of education may find that a monthly payout amount allows them to help incrementally, covering the costs of room, board, and other necessities. A line of credit that you draw from as needed to supplement where the students’ resources fall short.
Whatever you decide, you should be clear about your contribution upfront so that the student can plan for their future obligations.
How This Decision Will Affect Your Legacy
While it can be very rewarding to see the fruits of your life work put to use while you are still living, this choice will likely impact the amount passed down to your heirs. A reverse mortgage is a loan, and like any loan, you will be charged interest over time. The charged interest will come due as part of the loan balance when the last borrower on the mortgage leaves the home. This means that while you own your home, you will have less equity.
Assessing market conditions where you live can help you estimate how much the property may appreciate over time. You will also need to calculate the impact of compounding interest on your loan balance to project your equity in different scenarios. Again, consulting a trusted financial advisor is an excellent way to help you get a handle on these numbers and understand the full impact of this decision on your estate plan.
It’s also important to understand that while the amount they inherit will likely be less, your heirs will not take on any debt due to your reverse mortgage. When the mortgage comes due, heirs will decide how best to settle it. They may choose how to do that by taking on a new conventional mortgage, selling the home, or signing a deed in lieu of foreclosure. Should they decide to sell the house, they will receive the full sale proceeds minus the amount owed on the reverse mortgage.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.