Estate Planning & Reverse Mortgages

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.

What is a Reverse Mortgage? 

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.

How Does a Reverse Mortgage Work? 

A reverse mortgage is a type of loan that allows homeowners to borrow money against the equity in their home. Here's how a reverse mortgage works:

1. Eligibility: To qualify for a reverse mortgage, you must be at least 62 years old, own your home outright or have a significant amount of equity in it, and live in the home as your primary residence.

2. Loan Amount: The amount you can borrow with a reverse mortgage is based on factors such as your age, the value of your home, current interest rates, and the specific reverse mortgage program you choose.

3. Repayment: Unlike a traditional mortgage, with a reverse mortgage, you do not make monthly mortgage payments. Instead, the loan and interest are repaid when you no longer live in the home. This can occur if you sell the home, move out permanently, or pass away. The loan is typically paid off using the proceeds from the sale of the home.

4. Home Ownership: With a reverse mortgage, you retain ownership of your home. The lender does not take ownership of the property. You are still responsible for property taxes, insurance, and maintaining the home.

5. Disbursement Options: You can receive the funds from a reverse mortgage in various ways, such as a lump sum, a line of credit, fixed monthly payments, or a combination of these options. It's essential to discuss the available disbursement options with your lender to determine what works best for your financial situation.

6. Counseling: Before obtaining a reverse mortgage, you are required to undergo counseling with an approved housing counseling agency. This counseling session helps ensure that you understand the terms and implications of a reverse mortgage.

It's important to note that while a reverse mortgage can provide additional income or funds for seniors, it is a complex financial product. It's advisable to consult with a reverse mortgage specialist or financial advisor to fully understand the implications and determine if it aligns with your long-term financial goals.

What Happens to the Home Loan? 

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.

Who Owns the House in a Reverse Mortgage? 

In a reverse mortgage, the homeowner retains ownership of the house. The lender does not own the house. The reverse mortgage allows homeowners to borrow against the equity in their home without making monthly mortgage payments.

What Happens to the House After the Death of the Borrower? 

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 a Reverse Mortgage 

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.

Contact us today to coordinate your reversed mortgage with your estate plan.