A reverse mortgage is a special loan for seniors. To qualify for it, the borrower has to be at least 62 years old and own a home in which he has some equity. The lender provides the borrower with funds, which he doesn't have to pay back. If the borrower wants to transfer the home title to a child, he should reconsider the decision to take out a reverse mortgage.
Losing the Home
The reverse mortgage lender does not require the borrower to make any payments to pay off his loan. The lender typically takes possession of the property when the borrower dies, moves out or decides to sell the property. Because of this benefit, the homeowner can't transfer the reverse mortgage title to anyone. At the end of the reverse mortgage, the lender sells the property and takes the sale proceeds to cover the debt amount. Any remaining amount goes to the borrower or his heir. It is possible that the child gets nothing from the property sale.
Paying Off the Loan
If the borrower wants a child to retain the property, he has to pay off the reverse mortgage. He may have to take out other loans or dip into his savings to pay off the reverse mortgage debt. If he cashes in term deposits or annuities, he may have to pay penalties for early withdrawal. After paying off the reverse mortgage, the borrower gets the right to keep the property even after his death, move-out date or property sale.
If the homeowner wishes to transfer the home title to a child, a reverse mortgage is not an appropriate way to obtain funds. It depletes equity in the property, possibly leading to the child getting nothing in the end. It also comes with high costs compared to other home loans. The homeowner usually has to pay an origination fee of 2 percent of the home value and a mortgage insurance premium of 2 percent. Other costs include title searches and appraisals.
The homeowner should consider other alternatives if he wants to transfer the home title to a child. If he has equity in his home and wants to turn it into cash he can use, he can get a refinancing instead. The homeowner would pay lower fees and would not have to pay for mortgage insurance if he has much equity in the home. The homeowner has to make monthly payments to cover the debt balance, but he will have a home to give to the child.
Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.