A reverse mortgage can be a necessary lifeline for a senior who is house-rich and cash-poor. Seniors can use the equity they've built in their homes to add to or provide an income during retirement years. Some seniors use a reverse mortgage to make necessary improvements to the house. Homeowners should realize, though, that when they take out a reverse mortgage, they are leaving less of an asset for their heirs.
Less of an Inheritance
Many seniors wish to leave their home to their child or children when they die. They still can when they take out a reverse mortgage, but the heirs first need to deal with the reverse mortgage before they can claim the house. Sometimes the heirs can afford to do that, and sometimes they can't, depending on the circumstances of the reverse mortgage.
Must Pay It Back
When a person with a reverse mortgage dies, the heirs retain the right to the house, but they don't own it free and clear. They first must pay back what the senior borrowed. A reverse mortgage was taking equity from the home to pay for the homeowner's expenses. Sometimes the homeowner takes the reverse mortgage in one lump sum, and in other arrangements the homeowner has a line of credit that he can use monthly to pay bills. If the homeowner dies after using $100,000 of reverse mortgage money, for example, his heirs would owe the reverse mortgage lender the $100,000 plus any fees and interest accrued.
Decision Making Time
Heirs have four choices when a loved one with a reverse mortgage dies. They can repay the loan, including the interest and fees, and keep the house. They can sell the home and use the proceeds to pay the reverse mortgage. They can deed the loan to the lender, or they can do nothing and walk away from the inheritance. If the heir cannot afford to pay the reverse mortgage or cannot get the financing needed to pay it, he needs to use one of the other options. If the heir deeds the property to the lender or walks away, he is entitled to any overage the house might fetch on the market if the lender sells the property for more than the outstanding reverse mortgage.
About Selling the House
Lenders typically give heirs up to 12 months to sell the property and pay off the reverse mortgage. During the 12 months, interest continues to accrue on the reverse mortgage, and the usual property taxes and any homeowners association dues on the property need to be paid. If the reverse mortgage owed is more than the home is worth, the heir is not responsible for the shortfall, but heirs need to sell the house for at least 95 percent of the home's appraised value. Otherwise, some heirs might try to sell the house for far below market value to a friend or relative, knowing that they do not need to pay a shortfall.
- D. Anschutz/Photodisc/Getty Images