It is important to understand how reverse mortgages work and have an estate plan in place that works WITH the reverse mortgage at the time of death. If you are considering a reverse mortgage, have a reverse mortgage, or are a family member of someone who has a reverse mortgage, you should know what options exist for keeping the house and what responsibility exists regarding paying off the reverse mortgage at the death of the borrower.
A reverse mortgage is a loan that allows a homeowner to borrow money using that home as security for the loan. The borrower receives regular payments, a lump sum, or a line of credit in exchange for reductions in the equity in the borrower’s home. The title to the house remains in the name of the homeowner and the loan is repaid when the borrower no longer lives in the home. The borrower can use the payments, lump sum, or line of credit for things such as supplementing retirement income.
It is important for reverse mortgage borrowers and their families to understand that the amount the homeowner owes to the lender goes up as payments, a lump sum, or a line of credit are made available to the borrower. Interest and fees are added to the amount made available to the borrower. When the borrower sells the house, no longer uses the residence as their primary residence, or dies, the lender will control the home and any equity above the amount due in the reverse mortgage amount will be available to the borrower’s beneficiaries.
If the beneficiaries want to keep a house after the death of a reverse mortgage borrower, the beneficiaries must pay off the loan balance to keep the house. If the beneficiaries want to sell the house, they may be able to receive money from the equity in the home as long as they can sell the house for more than the balance on the loan.
Estate planning with reverse mortgages should include discussing with beneficiaries whether they want to keep the house after the borrower’s death. If beneficiaries want to keep the house, it is important to consider how they will pay off the reverse mortgage. Estate planning with reverse mortgages should include discussions regarding life insurance that might pay the loan balance, options to gift the proceeds to beneficiaries during the borrower’s lifetime, taxes on the sale of the reverse mortgaged property, taxes on the equity left to beneficiaries, and how to maximize the value of a reverse mortgage for the borrower and/or the beneficiaries.
Reverse mortgage borrowers and their heirs need to understand how the loan works and properly plan for the loan in advance to maximize the benefits and reduce the downsides of reverse mortgages. Our Texas estate planning attorneys can help you and your loved plan with reverse mortgages.