How Does A Reverse Mortgage Work When You Die?

A reverse mortgage is the last loan that borrowers will need in their life. It is given out to homeowners who have built equity in their homes over the years.

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 Do You Pay Back A Reverse Mortgage?

For many borrowers, a reverse mortgage is a very attractive loan as there are no monthly payments on the loan. Repayments do not start until the maturity of the loan. The loan matures when the primary borrower or the primary borrower’s dependant spouse does not live in the home for 12 consecutive months. This can be if they move into a nursing home,  sell the home, go on a long vacation, or pass away.

When the loan matures, the repayment for it becomes due all at once. It is up to the heirs of the home to decide how they may want to pay it back. If the primary borrowers pass away, the lender will contact the heirs and give them a complete list of the options available to them to pay off the loan as well as any restrictions on the repayment options. The heirs then have 30 days to come to a decision and inform the lender how they wish to proceed. Another 6 months are granted to the heirs to arrange and make the payments on behalf of the lender.

To pay back a reverse mortgage, heirs can either move to sell the property and pay back the loan, keeping any leftover equity for themselves, or they can pay off the loan and keep the house to themselves. Though it seldom happens, sometimes the equity in the home is less than the loan to be paid off. The sale price is then insufficient to cover the loan. In this case, if the reverse mortgage is a Home Equity Conversion Mortgage (HECM), then borrowers are protected under federal laws, and heirs will only be responsible for the amount covered by the sale price. The rest of the amount is covered by an insurance backed by the Federal Housing Administration.

Heirs may choose to keep the property to themselves instead of selling it off. In this situation, they will either have to use their savings to pay off the loan or use a refinancing option. Traditional mortgages are the most popular way to refinance the existing loan on the house. Some heirs may also qualify to get another reverse mortgage to refinance the old one on lower interest rates.

Keep in mind that the lender will only deal with relevant people about the loan. The borrower needs to give written authorization to his or her heirs so that they can adequately dispose of the loan on their behalf.

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.

For many people, a reverse mortgage might not be the best way to get some extra income. You can consider alternatives to a reverse mortgage, like getting a home equity line of credit or home equity loan, downsizing and moving into a more affordable place, open your home to monthly renters or vacationers, apply for assistance programs, etc. Make sure you look at all the available options before you make any move.

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. 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.

Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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