What You Should Know About Reverse Mortgages, Part 2

 Posted on November 07, 2017 in Estate Planning

Recently, a previous post on this blog discussed the definition and some of the possible benefits of reverse mortgages. In that article, we talked about how reverse mortgages are often taken out by seniors to supplement their retirement income by borrowing against the equity they have built in their homes. In many situations, a reverse mortgage may be an appropriate option, but it is important to consider that reverse mortgages could also have some disadvantages—including an impact on the assets passed down to a person’s heirs.

Unforeseen Costs

The entire point of a reverse mortgage is to give an elderly person—62 is the minimum qualifying age—access to additional money during his or her lifetime. The amount a person can borrow in reverse mortgage is dependent on a number of factors including the type of reverse mortgage, the borrower’s age, the value of the home, and interest rates. Of course, in most cases, the lender will also apply a number of costs and fees, including an origination fee, costs at closing, and servicing fees for the life of the loan. Some lenders also charge for mortgage insurance premiums for certain reverse mortgages.

All of this adds up to mean that a reverse mortgage lender may end up collecting far more than the borrower ever has access to, especially once the interest is paid. A reverse mortgage can provide extra money, but it comes at a cost.

Continued Homeownership Expenses

During the life of a reverse mortgage, the borrower retains the title to the home. Therefore, he or she is still responsible for all maintenance, utilities, taxes, and insurance. Failure to maintain the home, to keep homeowners insurance, or to pay taxes, could result in the loan coming due immediately. A person who cannot already afford the upkeep on their home is probably not a good candidate for a reverse mortgage.

Estate Planning Considerations

In most cases, a reverse mortgage is paid off by turning the title of the home over to the lender so it can be sold. This usually occurs when the borrower dies or moves out the home for 12 months or longer. While any remaining proceeds of the sale must be returned to the borrower or his or her heir’s, repaying the loan in such a manner means that the home will no longer be part of the person’s estate.

It is possible for the person’s heirs to pay off the reverse mortgage with other funds so that the house can remain in the family. Most reverse mortgage payoffs are limited to the appraised value of the home, regardless of how much the borrower received during his or her lifetime.

Call for Guidance

If your loved one has taken out a reverse mortgage and you have questions about how the decision could affect you as a potential beneficiary in his or her estate plan, contact an experienced Lombard estate planning attorney. Call 630-426-0196 for a confidential consultation today.

Sources:

https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

http://www.bankrate.com/retirement/reverse-mortgage-what-is-it-and-how-does-it-work/