Reverse Mortgage After Death: What Happens?
A reverse mortgage can be a valuable tool for seniors seeking to access their home equity. It can provide a steady stream of income, allowing retirees to maintain their lifestyle and remain in their homes. However, reverse mortgages also come with significant implications for the homeowner’s family.
Reverse mortgages are designed to be repaid only when the home is sold or the borrower passes away. This means that surviving family members may be responsible for repaying the loan balance, which can be a financial burden. To lessen these risks, a well-crafted estate plan should be in place. Here’s everything else you should know about a reverse mortgage after death.
When I Pass On, What Will My Family’s Repayment Options Be?
In the case of a married couple, a loan will not end when one passes, as long as the remaining spouse is listed as a borrower. Upon the death of the remaining spouse, the lender will present heirs of the estate with repayment options. Typically, heirs will have around 6 months to pay off the loan. There are usually three options: keep the property, sell the property, or hand over the keys. This decision is typically driven by the amount of home equity that is left.
To sum it up:
- Reverse mortgages continue for surviving spouses.
- Heirs have 6 months to repay the loan after both spouses die.
- Repayment options include keeping, selling, or handing over the home.
- The decision depends on the amount of remaining home equity.
Understanding and Choosing a Repayment Option
Almost all reverse mortgages are federally insured Home Equity Conversion Mortgages (HECMs). This is because HECMs offer major benefits that other reverse mortgages do not offer.
Upon the death of the last homeowner, the lender will send an appraiser to the property to determine the value of the home. The lender must then make an offer to settle the mortgage. Reverse mortgages are considered non-recourse loans which means that if the loan amount exceeds the home’s value, the balance is not required to be paid. This is extremely important because it means the lender cannot go after a person’s other assets or real estate to fulfill the payment. Instead, the difference is covered by federal mortgage insurance.
- Example 1 – If a home’s value is $300,000 and the remaining loan balance is $350,000, the heir(s) would need to pay $285,000 (95% of $300,000). $15,000 is the difference that’s covered by government insurance.
- Example 2 – If the remaining loan balance is $300,000 and the home’s appraised value is $350,000 then heirs would pay the $300,000 loan balance.
Most people don’t just have large sums of money like this on hand. The remaining loan balance will often need to be paid off by selling the home. If the estate has no potential equity, then heirs may also simply hand over the keys to the lender.
Creating a Well-Crafted Estate Plan
Paying back a reverse mortgage almost always ends in the sale of the house. Very few individuals will have the available capital to pay off the loan balance and keep the home at the same time. This is why all seniors need to have a well-crafted estate plan.
If you’re considering a reverse mortgage, you should consult with a financial advisor and involve your family in the planning process. A financial advisor can help you and your family create a plan and obtain the tools necessary for protecting your assets.
Related Podcast:
Popular Articles About Reverse Mortgage
Originally published October 17, 2024
Author(s):
