How Does A Reverse Mortgage Work When You Die?

If you are above 62 years of age, you can supplement your income using this loan. You are not responsible for paying off the loan – the loan becomes due and payable after you vacate your house. So who pays the loan and how does a reverse mortgage work when you die? We cover it all here.

How Does Reverse Mortgage Work?

A reverse mortgage is a way for people 62 years and older to borrow against the equity tied up in their homes. Unlike a traditional mortgage, the borrower does not have to make any monthly payments to the lender. Instead, they receive monthly payments from the lender for their personal use. The reverse mortgage is taken on the equity available in the home, while the home acts as collateral for the loan.

The borrower must pay the home insurance, the property tax, and maintenance costs to keep receiving the mortgage payments. How much money the borrower receives as the reverse mortgage depends on the market value of your house, your age, and the current interest rates. The fact that your house is the collateral for the loan, and that a reverse mortgage lowers the equity available in your home and increases the debt, makes it a risky option for homeowners to consider.

How to Repay a Reverse Mortgage: A Simple Guide

A reverse mortgage offers the benefit of no monthly payments, with repayment due only when the loan matures. The loan matures if the primary borrower or their spouse moves out for 12 consecutive months, sells the home, or passes away.

When the loan matures, repayment is due in full. The borrower’s heirs are responsible for deciding how to repay the loan. If the primary borrower passes away, the lender will inform the heirs of their options. They must choose a repayment option within 30 days and have an additional 6 months to settle the debt.

To repay a reverse mortgage, heirs can either sell the home to cover the loan and keep any remaining equity, or they can pay off the loan and keep the house. If the sale price is less than the loan balance, heirs are protected by federal law under a Home Equity Conversion Mortgage (HECM). In this case, they are only responsible for the sale amount, with the difference covered by insurance.

If heirs prefer to keep the home, they may use savings or explore refinancing options, such as a traditional mortgage. In some cases, heirs may qualify for a new reverse mortgage to pay off the existing loan at lower rates.

Heirs can only discuss loan repayment with the lender if they have written authorization from the borrower. This ensures proper handling of the loan upon maturity.

Can You Walk Away From A Reverse Mortgage?

If you feel that you are not in any need of the property on which the reverse mortgage was taken out or you will not be able to pay off the loan, you can walk away from it. Walking away from a reverse mortgage simply means that the lender can foreclose on your property and put it up for sale. If it is a HECM loan, the borrower or the heirs are not responsible for any deficiency balance, that is, the difference that exists between the loan and the selling price of the home.

What Is The Downside To A Reverse Mortgage?

A reverse mortgage is a tempting way to afford home improvements or go for a vacation with your loved ones. However, a reverse mortgage is not only an extra income, it is a loan. Before you fill in the application for a reverse mortgage, it’s worthwhile to weigh the pros and cons of a reverse mortgage.

First, let’s look at the benefits of a reverse mortgage:

1. It is an extra source of income for retirees and people 62 years and older.
2. The borrower can continue to live in the home and retain the title of the house as long as he or she pays the insurance, property taxes, homeowners association fees, and maintenance on your home.
3. Depending on the need, the borrower can withdraw the loan as a lump-sum payment, a line of credit that can be used to withdraw funds as and when needed, or receive fixed monthly payments from the lender, or use a combination of these.
4. Unlike an HSA account where funds are withdrawn can also be used for medical purposes, the borrower can use the loan for any personal need. There is no restriction on how the loan should be spent. Many borrowers use it to pay off existing mortgages, or make home improvements necessary for old age, or even use it to pay the insurance and taxes on your home. Some people also pay for their children or grandchildren’s college or go on a vacation with the loan proceeds. The options are limitless.
5. Closing costs can be paid off using the loan proceeds, so out of pocket costs can be very low.
6. A reverse mortgage loan is a non-recourse loan. That means if your loan amount is more than the value of your home, you are not liable to pay it.
7. Your heirs get any remaining equity after selling your home and paying off the debt.

Now, the downsides to a reverse mortgage:

1. Your payable loan balance increases with time as the loan interest and fees accumulate. The interest keeps accumulating until the loan is paid off, even if you are no more receiving any funds. Your debt continues to increase.
2. The equity in your home falls. This brings down the value of your home.
3. There might not be enough assets available for your heirs. If they wish to inherit your home, they will have to pay back the loan within a limited time period, which can prove too burdensome on their finances.
4. If you have dependants living with you, they might be left without a residence after you pass away or move into a nursing home. The reverse mortgage pays as long as the original borrower uses the residence as his or her primary residence. As soon as they move out or leave it for any reason, the loan on the house becomes payable.
5. The closing costs for a reverse mortgage will be higher than for a traditional mortgage. If not paid at the origination of the loan, they have to be paid at the time of repayment of the loan with interest.
6. If you are planning on moving soon or think you might have to move soon, then a reverse mortgage is a very unwise decision. For instance, if you are thinking of moving in with a child, or into a treatment facility or nursing home, then the repayment of the loan becomes binding on you. This will mean that your finances will take a heavy hit as the loan payment becomes due and payable within 6 months with the accrued interest.

A reverse mortgage may not be ideal; consider alternatives like home equity loans, downsizing, renting, or assistance programs.

Can You Inherit A House With A Reverse Mortgage?

If you are listed as an heir to a property, you will end up inheriting it when the original borrowers and the non-eligible spouse move out. If the owners of the house had taken out a reverse mortgage on it, you can end up inheriting a house with a reverse mortgage. Moreover, if this happens, then you can either choose to rid the house of the loan and keep it to yourself or walk away from the property and let the lender deal with it.

If you choose to keep the house, you can either pay off the loan or buy it back for 95 percent of its appraised value, whichever amount is lesser. If you don’t think you can afford the upkeep of the house, you may sell it and pay off the loan, keeping any leftover equity to yourself after paying the tax on it. Or, you can sign the deed, hand it over to the lender, and walk away. You will not have to deal with the property or the loan on it at all.

Who Pays Off Deceased’s Reverse Mortgage?

A deceased reverse mortgage is paid off by the heirs of the deceased. They may choose to sell the house to pay for the reverse mortgage, refinance the loan and keep the house, or use funds from private savings account to pay it off.

Conclusion

In the end, a reverse mortgage can be a valuable tool for homeowners over 62, offering financial flexibility without monthly payments. However, it’s important to understand how the loan works, especially when it comes to repayment after death. While heirs can choose to sell the property or refinance the loan to keep the home, they must carefully consider the long-term implications, including the risk of accumulating debt and reduced equity.

Before moving forward with a reverse mortgage, it’s crucial to weigh all options and ensure that both you and your heirs are prepared for the future. Alternatives like home equity loans or downsizing might be worth exploring if you’re unsure. By making informed decisions, you can make the most of your home’s equity while protecting your loved ones from unexpected financial burdens.