One of the central questions that many retirees have about Reverse Mortgages involves how such a loan affects their ability to leave an inheritance to their heirs.
In short, if you take out a reverse mortgage, you can leave your home to your heirs when you die, but you won’t be leaving them the entire worth of the property. It’s important to understand how a Reverse Mortgage works before you sign on such a loan because your heirs will need to deal with repaying the reverse mortgage if they want to keep the property.
A reverse mortgage is basically a loan that allows older homeowners to convert a portion of the equity in their home into cash in the form of monthly payments, a line of credit, or a combination of these options.
A Reverse Mortgage is different from a regular “forward” mortgage. With a reverse mortgage, the lender makes payments to the homeowner, rather than the homeowner making payments to the lender. As the property owner receives payments from the lender, his equity in the property decreases over time as the loan balance increases.
Reverse Mortgage Eligibility
Reverse Mortgages, also known as Home Equity Conversion Mortgages, are limited to borrowers who
- are at least 62 years of age
- occupy the property as their principal residence, and
- own the home outright or have paid off more than half of the existing mortgage on the property
Repaying a Reverse Mortgage
The borrower must repay the lender when one of the following events occurs:
- the borrower dies
- the home is no longer the borrower’s principal residence (the borrower moves out or is hospitalized for more than 12 months)
- the borrower sells the home (or transfers title), or
- the borrower defaults on the terms of the loan (such as by failing to keep up with insurance premiums or property taxes). (
What The Reverse Mortgage Means For Heirs
When the person who has signed on for a reverse mortgage dies, the heirs can inherit the house, but they will not receive free and clear title to the property since the property is still subject to the reverse mortgage.
For example, if the homeowner dies after receiving $100,000 of reverse mortgage funds, the heirs inherit the home subject to payoff of the $100,000 debt along with any fees and interest that has accrued.
Option for Heirs
Individuals who inherit a home that is subject to a reverse mortgage can choose one of four options. They can:
- pay back the loan
- sell the property and use the proceeds to repay the reverse mortgage
- deed the home to the lender, or
- do nothing and let the lending institution foreclose.
Home Equity Conversion Mortgages
The Federal Housing Administration is the governmental agency that’s responsible for administering and insuring HECM loans. With a HECM, heirs can satisfy the loan by selling the property and paying the lending institution the lesser of:
- 95% of the home’s appraised value. (Heirs can also choose to repay 95% of the appraised value if they don’t want to sell the home. FHA insurance then covers the remaining loan balance) or
- the outstanding loan balance
Reverse mortgages are complicated so before taking out a reverse mortgage and tapping into a home’s equity, a potential borrower should be sure to explore all of the facets of the loan including the borrower’s obligations, the third-party costs and the draw options. Borrowers should gather all information before making a decision by doing their own research, speaking to the lending institution and using their counseling session with a HUD-approved counselor to ask questions.