What exactly is a reverse mortgage? How does a reverse mortgage work when you die? Read on to find out the answer to these and many more questions.
So what is a reverse mortgage? It is sometimes billed as the last mortgage you will ever need. A reverse mortgage is a type of loan, one which enables you to access money from the equity in your home without the necessity of selling your home. It is also sometimes known as “equity release.” On a reverse mortgage, you can usually borrow up to a specific percentage of your home’s current value.
In order for you to qualify for a reverse mortgage, you have to be at least 55 years of age, and you have to be a homeowner. It is most useful if you have already built up a significant amount of equity in your home.
The home you use as collateral for a reverse mortgage needs to be the primary residence. This means that you have to live in that home for half of the year or more.
If you still have a mortgage on your primary residence, you have to pay off that mortgage when you take out a reverse mortgage. The money you get from a reverse mortgage can be used to pay the mortgage on your house (or any other debt against it).
So what are the benefits of a reverse mortgage? Why would you want one? Well, a reverse mortgage requires no monthly payments. That’s right: you can use the equity in your home, continue owning your home, and pay no monthly payments toward your home. Also, the amount you borrow is non-taxable. The loan can be disbursed to you in a variety of ways, as installments, a lump sum, or some combination of the two. The money from the reverse mortgage in no way affects your Guaranteed Income Supplement benefits, your Old Age Security, or any income you may earn from your Registered Retirement Savings Plan. The most important benefit of a reverse mortgage is that you retain ownership of the home. It’s like getting the benefits of selling your home without actually needing to sell your home.
So, How Does A Reverse Mortgage Work When You Die?
Alright, let’s get into the meat and potatoes of this article. How does a reverse mortgage work when you die? If you are worried about the effect a reverse mortgage will have on your heirs, here is what you need to know:
- A reverse mortgage oftentimes comes with higher interest rates than a home equity line of credit (HELOC) or a traditional mortgage. This means that your heirs will inherit less home equity than they might have if you kept a traditional mortgage or took out a HELOC.
- The interest is compounded, which means that the mortgage could grow quickly. Luckily, your home’s value is also quite likely to go up at that time, so this may keep costs even. However, your heirs would then miss out on the increase in the value of your home.
- If your home equity drops to zero (or below zero) or the value of the home is not enough to cover the balance of the loan, your heirs will not be stuck with this problem. A reverse mortgage loan is a non-recourse loan, so your heirs will not have to repay more than the fair market value of the home. They certainly will not have to use their other assets as a basis for repayment.
Talk to your heirs about their potential responsibilities before deciding whether or not to take out a reverse mortgage. Reassure them with its benefits, but make sure they are aware of its downsides as well. They can help you come to an informed decision.
Now that we’ve answered the question “how does a reverse mortgage work when you die?” let’s take a look at some other common inquiries about this topic.
Frequently Asked Questions
What happens if you inherit a house with a reverse mortgage?
You inherit a house with a reverse mortgage upon the death of the last borrower. The reverse mortgage on that home then becomes your responsibility to deal with. Because a reverse mortgage is due when the homeowner moves out, sells the home, or dies, the reverse mortgage is now due. It is up to the heirs to handle the loan.
When you inherit a house with a reverse mortgage, the loan provider sets a particular time for you to settle the loan amount as well as the interest which has accumulated on the loan. This makes it the responsibility of the heir of a reverse mortgage to pay off that loan.
The heir or heirs can handle the reverse mortgage inheritance in a few different ways. The best way to deal with a reverse mortgage inheritance depends on the amount of equity left in the home.
Because a reverse mortgage requires no monthly payments during the lifetime of the borrower but still accrues interest, the homeowner who takes out reverse equity on his or her home may lose equity in that home.
If the home still has enough equity, the heirs can sell the home in order to repay the loan. After they use the money from the sale to pay off the loan, any remaining home equity belongs to the heirs. In the rare case that the value of the home sale yields less than the amount of the loan repayment, HomeEquity Bank’s negative equity guarantee guarantees that the person repaying the loan will not have to pay more than the home’s fair market value at the time of the loan due date.
The heirs can also choose to retain the home by refinancing the loan. This allows the heirs to keep the property, but they will then be responsible for paying the newly refinanced loan, which will probably involve a monthly payment.
If the heirs do not want to deal with the home (either sell it or retain it), they can give the keys to the home to the loan provider, sign the foreclosure deed, and walk away from the home. After handing over those keys and signing that foreclosure deed, the heirs do not have to take part in any more dealings regarding that home. This third option is usually quite favorable if the home no longer has any equity (due to the amount borrowed on the reverse mortgage and the interest accumulated).
Can heirs walk away from a reverse mortgage?
Yes, heirs are technically able to walk away from a reverse mortgage. All they need to do is sign a foreclosure deed and give the keys to the lender. This means that the heirs do not have to go through the trouble of either selling the home or attempting to retain the home by paying off the loan or refinancing to pay off the loan.
If the heirs do not want to deal with the home (either sell it or retain it), they can give the keys to the home to the loan provider, sign the foreclosure deed, and walk away from the home. After handing over those keys and signing that foreclosure deed, the heirs do not have to take part in any more dealings regarding that home.
So yes, you can basically walk away from a reverse mortgage. You just need to hand over the keys and sign the foreclosure agreement.
Can a family member take over a reverse mortgage?
If one of the borrowers of a reverse mortgage passes away, the other person on the deed (usually the spouse) may keep living in that home without the need to settle the reverse mortgage loan. Once the last borrower or homeowner with the reverse mortgage dies, the reverse mortgage passes to the heirs. But the heirs usually cannot take over the reverse mortgage with the same terms.
The heirs have to pay off the reverse mortgage, either by selling the home to pay off the loan, refinancing the loan, or turning over the keys to the property and signing the foreclosure agreement. So a family member generally cannot take over a reverse mortgage as is, unless that family member is one of the original borrowers or homeowners.
Who owns the house after a reverse mortgage?
When you get a reverse mortgage, you still own your home. This is actually one of the major benefits of the reverse mortgage: the fact that you retain ownership of your home without needing to pay those monthly payments. With a reverse mortgage, you remain the owner of the home. Even when you die and your heirs inherit the home with the reverse mortgage on it, it is still possible for them to retain the ownership of the home.
They can continue to own the home simply by paying off the loan (plus the accumulated interest). So after you take out a reverse mortgage, you still own the home until you move out, sell it, or pass away. And if you pass away, your heirs own the home until they decide not to own the home (by selling it to settle the loan or signing a foreclosure deed and handing over the keys).
It is now their home, and they can decide to deal with it as they please. They just need to pay off the loan. And they can do this by refinancing, paying it outright with a single payment, selling the home to pay off the loan and keeping the remaining money for themselves, or settling the loan by signing a foreclosure deed and handing over the keys.