A reverse mortgage allows you to live in your home for life requiring no monthly repayments. Your benefit amount is based on borrowers’ ages, property value, HUD lending limits and interest rates, not the amount you owe so you may receive only enough to pay off your existing loan on the home, but in many instances, borrowers receive a large enough benefit to pay off their existing mortgage and still give them additional funds for other uses.
Heirs Have Indirect Benefits to Reverse Mortgages
Firstly, if you need the equity or other funds to remain in place and your children are unable to assist you, it helps to relieve any burden on them to try to come up with additional funds to help you each month.
The loan allows you to live in the home payment free for life and no matter how long that is, how much you borrow, how much the reverse mortgage interest accrues or what property values do in the future, it assures heirs that they will never owe more than the property is worth.
In other words, if you pass and the balance on the loan is higher than the property value, the lender and HUD can never look to other estate assets or heirs to pay that shortfall.
Reverse Mortgages are Non-Recourse to Heirs
Heirs always have the right to keep any equity or if there is no equity, to retain the property at 95% of the current market value or the amount owed on the loan, whichever is less.
This allows them to qualify for conventional financing if that is their choice and does not require them to repay an obligation totaling more than the value of the home if they want to keep it.
And if there is no one in the family that does want the house and they don’t believe it is in their best interest to sell it (no equity, etc.), they can walk away and owe nothing.
However, when we hear criticism of the loan from some who have not really considered all aspects of reverse mortgages, it is usually because if you choose to get a reverse mortgage, it can lessen the amount of the asset that you leave behind to your heirs.
How Reverse Mortgage Interest Works
This is true, but no one stops to think that if you have a regular loan, that is also the case. Any loan lowers the equity in the property and therefore, there is less inheritance to pass on to future generations.
And the fact that you make no monthly payments and interest accrues raising the balance owed is another argument that asset conscious people use to criticize the loan.
However, if you review the amortization schedule of any loan, you pay mostly interest in the early years of the loan and over the course of 30 years, you pay a substantial amount of interest above and beyond the principal you borrowed.
If just passing the most asset to a future generation is your goal, you should never seek any loans or debt of any kind. Unfortunately, most of us cannot live totally debt free all our lives or purchase real estate for cash.
And what most people don’t consider is that if you are able to make payments on the reverse mortgage to eliminate the balance from increasing, you can always do so at any time without penalty.
You can make payments in any amount at any time!
This means that you do not have to have an increasing balance but since there are no mortgage payments “due” at any time, if you find that your finances are such that you are not able to make a payment or only able to make a partial payment of the interest that accrued that month, there are no negative repercussions.
There are no late charges or negative credit concerns because you didn’t have a payment to make in the first place.
Reverse Mortgage Alternatives?
Another thing that many people do not consider if future generations are able to help, they can set up a family reverse mortgage to allow parents or other family members access to cash and then be repaid upon the passing of the older family members.
If you do choose this route, my suggestion would be to be sure everything is in writing so that there are no hard feelings among family members later if some run into monetary problems of their own and cannot continue to help as they first agreed or there are disagreements on the asset distributions after the repayment of funds advanced by some but not all family members.
At least with the reverse mortgage (like any other loan), the asset is sold, and you determine how all proceeds are split if you have a will or trust and there is no question about who did what.
Finally, I think that homeowners should consider a reverse mortgage for the benefits or the ramifications that it would have for them and their goals. We strongly suggest that you discuss it with your family.
There seems to be a strong resistance at times with some in that they do not want to “bother” kids with their finances or issues but it really helps if heirs are aware of the loan in advance and what they need to do when the time comes that they have to decide to keep or sell the home.
It also really helps if the owners have their kids/heirs set up in advance with the lender so that they can speak with the lender on behalf of the loan and have all title issues resolved in advance.
One good way to resolve title issues is to add children to title or to have a trust set up in advance and you should check with your family attorney to advise you in this regard.