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A reverse mortgage is one way to improve cash flow in your retirement years. It's a way to get cash from the equity in your house, just like a home equity loan, except you don't have to make monthly payments to pay it back. The amount you borrow comes due after you die. This can lead to some confusion and concern for your kids since they will handle your affairs after you pass on. Here are some things your heirs may want to know about a reverse mortgage.
When A Reverse Mortgage Is Due
You'll need to live in the home that has the reverse mortgage. If you decide to move in with your kids or move into an assisted living facility in your later years, you'll have to pay off the reverse mortgage even if you're still alive. If you don't keep up with the insurance and taxes, the reverse mortgage becomes due. And of course, once you die, the loan is due unless your spouse survives you and is also named on the mortgage.
When you pass away, your heirs must decide what they want to do with your home. It may depend on the value of the home and how much is due to pay it off. The mortgage lender will have your home appraised and then notify your heirs of the amount due and when it has to be paid. If the loan is not settled within that time frame, the lender may foreclose on the house. Foreclosure doesn't happen right away. Your heirs should have a few months to arrange financing or sell the house to come up with money to pay the loan.
There Is A Limit On How Much They Pay
The housing market is constantly changing and that can be worrisome since it is impossible to know what the value of your home will be ten to twenty years into the future. The government backs reverse mortgages and has some regulations established to help protect heirs. One of those is the rule that your heirs won't have to pay more than 95% of the current value of the home even if the original loan is for more than that amount. This protects your heirs in the event your home drops drastically in value over the years or due to a recession. On the other hand, if your home increases in value, your heirs can sell the home if they wish, pay the reverse mortgage off, and then keep the rest of the money.
They Aren't Obligated To Take A Financial Risk
You don't have to worry about putting your heirs' finances at risk to pay off the reverse mortgage. If one of your kids wants to take possession of the home, they will need to figure out a way to come up with the money to pay off the reverse mortgage. However, if your kids can't come up with the money, or if they don't want the home, it may not be worth trying to pay off the mortgage, especially if the mortgage is close to the value of the home. In that case, your heirs can let the lender foreclose on the home or they can deed the home back to the lender to avoid the foreclosure process. Then the lender will sell the home to get the money back and your heirs won't have to deal with it.
If you plan to leave your home to your heirs after you pass on, you'll want to make sure all of you understand how the reverse mortgage will affect their inheritance. Understanding how everything works helps your children be prepared for what they will have to go through to hold onto the home if they want it.
Share31 December 2017
