Reverse Mortgages and Estate Planning

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Reverse Mortgages and Estate Planning

Your house can be your most valuable possession and make up the majority of your estate. Reverse mortgages allow you to access your accrued home equity without having to sell your house, which may help you keep that asset. However, the money you get from the reverse mortgage will also need to be paid back after your passing, which might significantly lower the value of your estate.

What you should know about estate planning and reverse mortgages is provided here.

Key Takeaways

  • Your home’s worth will be diminished for your heirs if you have a reverse mortgage since it will need to be repaid after your passing.
  • The requirements for spouses inheriting properties with reverse mortgages are different from those for other heirs.
  • You may be able to enhance your retirement income with a reverse mortgage while preserving other estate assets.

What Happens to Your Reverse Mortgage After You Die?

When you give someone ownership of a house with a reverse mortgage, you also give them responsibility for the mortgage. Their connection to you will determine what they must do next.

If Your Heir Is Your Spouse

Three categories of spouses may inherit a house with a reverse mortgage. Which category your spouse belongs to will decide if they have a right to continue living in the house and maybe receiving reverse mortgage benefits.

  • Co-borrowing spouse—On the original loan documentation, a co-borrowing spouse is identified as such. Any co-borrower, who need not be your spouse, may continue to reside in the property and collect payments from the reverse mortgage.
  • Eligible non-borrowing spouses may be named on the mortgage even though they weren’t eligible to be co-borrowers (usually because they were younger than 62 at the time the loan was made). They may continue to live in the house if they fulfill further restrictions, but they won’t get any more money from the reverse mortgage.
  • Non-borrowing spouse who is ineligible—These spouses don’t fit the criteria for any of the first two groups. If they want to live there, they must purchase the house themselves. And they can sell it.
  Reverse Mortgage Pitfalls

When a co-borrower or qualified non-borrowing spouse passes away, the house and the reverse mortgage are included in their inheritance.

(Note that previous HECMs have somewhat different restrictions; this article only applies to HECMs insured by the Federal Housing Administration (FHA) and originated on or after August 4, 2014. Both sets of guidelines are available on the Consumer Financial Protection Bureau’s website.)

If Your Heir Is Someone Other than Your Spouse

They won’t be able to maintain the reverse mortgage if you leave your house to your children or other heirs who are not your spouse. Instead, they have a certain amount of time in which to repay it. They will essentially have three options:

  • Sell the house—Any equity left over once the mortgage is paid off is theirs to retain.
  • If they wish to retain the house, they may purchase it and use their own money to pay off the reverse mortgage.
  • Transfer ownership of the property to the lender – This kind of debt settlement is called a deed in lieu of foreclosure.

Fortunately, your heirs won’t inherit a net debt from a HECM, regardless of how much you owe on it. They are only required to make payments up to the lesser of the complete loan sum or 95% of the home’s assessed value. Any discrepancy will be covered by FHA insurance.

It’s possible that your successors may need to act soon. Although they may request an extension of up to a year to allow them time to sell the house or get finance to purchase it themselves, they technically only have 30 days after receiving a Due and Payable Notice from the lender. The decision they make will be influenced by a number of variables, such as how connected they are to the house and how much debt it contains.

  Proprietary Reverse Mortgage Definition

One recommendation you may come across online is to obtain a life insurance policy payable to your heirs using part of the reverse mortgage earnings. This can provide them the money they need to buy the house after your passing. However, you could need the whole amount you get from the reverse mortgage to pay your bills and won’t have any money left over to get life insurance, which can be expensive in later years. Still, for some individuals, this could be a choice.

If You Have Other Assets

People who don’t have enough cash saved up, retirement accounts, or non-retirement investment accounts may find reverse mortgages to be the most appealing option. In this case, their property is their only substantial financial asset.

For instance, it can make more sense to rely on your other assets for income if you know that your heirs want to receive your house rather than accruing a large reverse mortgage burden. Borrowing against your house, on the other hand, may be a means to protect your other assets for your heirs if they don’t have any special ties to it.

A reverse mortgage that you can draw on is one approach to secure your other assets in a bear market, according to Wade Pfau, author of Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement. You may use the reverse mortgage to generate income until prices increase once again rather than being compelled to sell assets when they are undervalued to augment your income. Of course, such flexibility comes at a cost in the form of the reverse mortgage’s high upfront charges.

In the event that you ever incur significant long-term care expenditures, a reverse mortgage may also assist to safeguard your other assets. But keep in mind, unless you have a co-borrower or qualified non-borrowing spouse residing there, the mortgage will need to be paid off if you leave the property and enter a care facility for 12 continuous months or longer.

  Home Equity Loan Fees vs. Mortgage Loan Fees

How much can you borrow with a reverse mortgage?

Your age (or the age of your co-borrower or eligible non-borrowing spouse, if they’re younger than you), the amount of equity you have in your house, and the current interest rates all play a role in how much you may borrow with a reverse mortgage. The current cap on a home equity conversion mortgage (HECM) with government insurance is $970,800.

Where can you get a reverse mortgage?

You must choose a lender that the Federal Housing Administration has authorized in order to get a HECM, the most popular sort of reverse mortgage (FHA).The U.S. Department of Housing and Urban Development, the parent company of the FHA, maintains a search engine for finding lenders.

At what age do most people get reverse mortgages?

Even though you may apply for a reverse mortgage at age 62, most individuals wait until they are older. According to a Consumer Financial Protection Bureau report, the median age of reverse mortgage borrowers in 2019, the most recent year for which data is available, was 73.

The Bottom Line

When you pass away, the amount of the value of your home—which may make up a significant portion of your estate—that will be distributed to your heirs will depend on whether you have a reverse mortgage on it. A reverse mortgage might assist you augment your income if you have financial assets in addition to your house while also protecting them for your estate. It’s important to have a long-distance conversation with your heirs about this matter since they will often be responsible for repaying the debt after you pass away.

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