What is a Reverse Mortgage?
A reverse mortgage is a method that allows a senior (over age 62) homeowner who has paid off most of the mortgage for their primary residence to borrow against their home equity. The homeowner must still pay taxes and main insurance and repairs on the property and must live in the property.
Basically, a reverse mortgage allows a homeowner to obtain cash for the equity in their home using one of three options:
- A single lump sum payment.
- Monthly payments for as long as the borrower lives in the home, or for a set period.
- A line of credit.
- Some combination of the above.
While the terms of the reverse mortgage vary with the lender, the homeowner can typically use the funds for any purpose. Once obtained, a reverse mortgage typically stays in effect until: a) All borrowers have died; b) The property is sold or transferred; c) The borrower fails to live in the property for a period longer than 12 months; or d) The borrower fails to maintain, pay taxes on, or insure the home according to FHA requirements.
Pros and Cons of Reverse Mortgage
- Allows the homeowner to stay in the home.
- Can pay off other existing mortgages on the home and other expenses.
- Simple to qualify for because no minimum credit score and generally no income requirements.
- No monthly mortgage payments required.
- The interest rate may be lower than traditional mortgages and home equity loans.
- A reverse mortgage can be a non-recourse loan, so the heirs will never be personally liable for more than the home is sold for (be sure to check this out before borrowing).
- Your heirs or beneficiaries still inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.upon payment of the balance due.
- A reverse mortgage does not affect Medicare or Social Security benefits
- Loan proceeds are not taxable.
- The origination cost of the loan can be higher than a conventional loan.
- Must carry FHA mortgage insurance
- The loan balance increases and the value of the home to the estate decreases over time.
- May effect Medicaid and other needs-based programs if monthly withdrawals are too high.
- Heirs and beneficiaries must repay the note upon the death of the borrower in order to keep the home.
- Lenders do not always adequately explain all the ramifications of the reverse mortgage.
- Reverse mortgages continue to accrue interest on the balance.
Reverse Mortgage Effects
The homeowner still retains title to the property, although the title has a lien against it. The property is still owned by the borrower and can be left as part of the estate.
If the borrower sells the property, just like any other sale, he or she pays the lender from the proceeds. In the event the property sells for less than what is owed, the borrower pays any difference.
Should the borrower have to move from the property for a period longer than 12 months, typically a nursing home or long term care facility, this violates the terms of the loan and the lender can take action, including foreclosure.
Reverse Mortgage and Inheritance
A reverse mortgage can be an estate planning tool. It can allow a senior to stay independent and to remain in their home. However, when considering a reverse mortgage, the the borrower should plan for what happens upon their death.
The homeowner can still leave the property to his or her beneficiaries or heirs upon death. A valid will distributes the property through probate. If there is no will, the property follows the Texas inheritance rules.
Although it is not all that different than leaving your heirs a home with any type of mortgage, a reverse mortgage presents additional challenges for those left behind. You can help to protect you heirs by obtaining a non-recourse mortgage.
If you inherited a property with a reverse mortgage, contact a qualified probate attorney immediately. The attorney can work with you and the lender to make arrangements to either pay off the loan independently or to sell the property and pay off the loan. Remember, if the beneficiaries or heirs cannot pay off the loan, the lender can, and will, take action.
It is very important that everyone have an estate plan in place. Consider all of your options when preparing your estate planning documents. If you contact our office and begin the process between before February 15, 2018, you will get 20% off of an estate planning package.
If you want more information about the FHA approved reverse mortgage, you can visit their site.