Many of you invested your hard-earned money into property so that one day, you would have something of value to leave your family once you had passed.
Making sure your loved ones are taken care of if and when you aren’t there to provide for them is an important consideration when making a significant financial investment.
Now, if your research (such as reading this blog, 🙂 ) has led you to the conclusion that a reverse mortgage is the best financial option for you and your family…
Then make sure to contact a qualified reverse mortgage originator (they’re the best people in the business to answer your questions) and discuss with them what happens to your property and the associated HECM loan once you’re no longer there to deal with it.
It’s important to understand the implications of how a reverse mortgage affects your home’s equity and how that will ultimately affect what your heirs receive from your estate.
For most, this is a tough topic to explore.
Nobody really wants to talk about dying or a future that they’re not a part of, however…
At the very least, you want to make sure the valuable assets you leave behind are allocated to the proper people and not lost to those they aren’t intended for.
Moreover, you want to make sure that you can maximize the benefit of these assets that are available for your family when you pass and minimize any expenses they might be faced with as a result.
This is a topic I get asked about all the time and really, there’s no easy way to tiptoe around it, so let’s take some time in today’s post to tackle it head-on and go over in detail what your heirs must deal with (after your passing, of course) when you take out a reverse mortgage…
Will My Heirs Get to Keep My House?
What’s important to note up-front is that if you’re the surviving spouse and listed as a borrower of the reverse mortgage, nothing will change with regard to the reverse mortgage conditions you have agreed to.
You will be able to remain in your house and any arrangement for disbursal of loan money will continue as stated in your loan agreement.
It’s important to make a distinction here because for the sake of our argument today, we’re looking at what happens when one (or all) of the listed borrowers of the reverse mortgage pass on and it falls upon heirs who are not named in any of the reverse mortgage paperwork to handle the property in question.
So, first things first…
If your heirs choose to do nothing, then the loan will default and the bank who issued the reverse mortgage will claim the property.
Your heirs won’t be sought after or hounded for money by the debtor and their credit won’t be affected since they were not the ones who legally agreed to the conditions of the reverse mortgage.
In this case though, they will also not be able to benefit from any equity gained due to an increase in the property’s value.
They will also have no legal claim to live on the property as the bank will become its eventual owner.
Now, your heirs can opt to retain the property if they want to as long as they satisfy repayment of the outstanding reverse mortgage debt exercised by you.
This can be done in a few ways:
- Lump sum cash payment
- New mortgage on the property
- Monthly payments
So, if they don’t have the means to pay off the entire reverse mortgage debt up-front (#s 1 & 2 above), in many cases, the bank who issued the reverse mortgage will also work with them to repay the loan in the same way someone would repay a traditional mortgage.
If they select this option, they will still have to pay interest that accrues during the repayment period though (just like with any other type of loan or credit card debt).
The good news is that the reverse mortgage debt can never surpass the home’s appraised value at the time the loan comes due.
In fact, the outstanding amount to be dealt with will be either the lesser of either:
- The reverse mortgage loan balance
- 95% of the appraised market value of the property.
- If mom and dad (the borrowers) took out a reverse mortgage and received a lump sum of $350,000…
- And when they died, the home appraised for only $300,000…
- Then son and daughter (the heirs) would only be responsible for repaying $285,000 in order to keep the property.
And once the debt is covered, they would have no further obligation to the bank, meaning that the property would be theirs free-and-clear.
Going forward, they could take out a traditional mortgage on the property, a home equity line of credit (HELOC), or even sell the property for its full market value and keep the proceeds.
This point leads us into our next topic…
Will My Family Still Get Reverse Mortgage Proceeds?
If the question is, “Will my heirs still be able to collect reverse mortgage money once I’m gone”, then the simple answer is no.
The contract for the reverse mortgage is between the borrower (you and possibly your spouse) and the bank, meaning that it doesn’t include a responsibility to provide monies to those who inherit the property and aren’t named as borrowers on the loan agreement.
As I mentioned above, if your spouse survives you and is named as a borrower on the loan contracts, then there’s no need to worry, the reverse mortgage will continue as agreed upon.
But those who survive you who are not legally part of this agreement will not have any additional funds distributed to them from the bank who issued the reverse mortgage.
In addition, any lines of credit opened by you will be closed.
I know this sounds disappointing at first glance, but the situation is not without its benefits.
Because your heirs will have 6 months after your passing to satisfy the loan or hand over the keys to the house, they have time to explore their options:
- Pay off the mortgage and keep the property
- Rent the property to cover monthly loan repayments to the bank
- Sell the property and keep the amount that exceeds the loan balance
Any way you slice it, they are not left without an asset they can hold on to and benefit from.
- Let’s say you took out a reverse mortgage for $350,000…
- Then, because years have passed and the real estate marked has grown, your heirs are able to sell the property after you’re gone for $550,000…
- That’s a $200,000 profit for them based on the asset that you left to them.
Really not a bad deal for them at all.
You’ve left them with a sizeable inheritance that can affect them in a life changing manner.
Or let’s suppose the following:
- You have a reverse mortgage balance of $200,000 when you pass…
- Your heirs can repay the debt for $1,000/month as per their agreement with the bank…
- Because the local market dictates it, they are able to charge renters $1400/month to live there…
- This results in $400/mon profit for them in perpetuity that will grow as rent values increase and the reverse mortgage debt decreases.
You’ve given them a recurring source of income that they can utilize for years to come with little effort and expense on their part.
In either case described above, that’s a tremendous gift to leave your loved ones, benefitting them for years to com.
Will My Heirs Lose Out if I Get a Reverse Mortgage?
There’s really no reason why your heirs should lose out on the property assets that you have accumulated and worked hard for when you decide to utilize a reverse mortgage for additional income.
In the worst-case scenario, they simply walk away from ownership of the property with no penalty or financial repercussion.
In most cases though, they will either be able to maintain ownership of your home or make a tidy profit from it via some of the methods I have outlined above.
The only thing you as the borrower must consider in the present is how much money you actually require for your own current needs vs. what you hope to leave to your family once you are no longer with them.
This is a complicated calculation as you really have no crystal ball that will predict real estate market trends or what situations may arise that may require expenditure of loan funds, however…
You can never really go wrong taking a little bit of time to contact and discuss these options with a seasoned reverse loan originator such as myself or any of my esteemed colleagues – yep, there’s my subtle sales pitch 😉
Most importantly, locate reliable sources of information and make the effort to think ahead in a proactive rather than reactive manner so that you can adequately prepare your family for the next steps that must happen when you’re no longer there to guide them.
As always, feel free to contact me anytime with questions you may have about the reverse mortgage process. If you’re a Texan like me, you can call me locally at (972) 803-3073 or from anywhere in the US via my toll-free number at (800) 304-4143.
Or if you’d rather write, then contact me via email ([email protected]) or by clicking on the button below.
Don’t be shy – this is a complex process with many options to be considered. You shouldn’t have to go at it alone. Ask lots of questions and always be informed.
Take care and check back soon for more reverse mortgage info…..