Information for Children About A Reverse Mortgage for their Parent(s)
A lot of children wonder what a reverse mortgage means for their inheritance. Here are two big things to know:
1. A reverse mortgage loan is based on a home’s value. When the home is sold (when someone moves, sells the home, or passes away), if the value of the home is higher than the loan, there may be leftover equity. This is especially true if home’s price has gone up in value or “appreciated.” A big advantage of a reverse mortgage for a lot of parents is maintaining financial independence and not having to rely on their children to support them.
2. The borrower continues to own their home with a reverse mortgage. The lender does own the home. There are some rules people need to follow though which include keeping property taxes up to date, maintaining homeowner’s insurance, and maintaining the home so that it is in good condition. If these rules are not followed, the loan can become due.
Things to know
- Reverse mortgages usually don’t impact Social Security or Medicare eligibility or benefits. If someone is also receiving other federal or state benefits (like MediCal and are less than 65, they should contact a reputable mortgage lender, tax attorney, and/or accountant to find out what impact a reverse mortgage may have on benefit eligibility, if any. It’s important to note that a reverse mortgage is a secured loan, which means that homeowners must follow the rules of the loan or they may risk what is called “foreclosure,” which is when the lender takes ownership of the home away from the lender.
- People can use money they receive from a reverse mortgage any way they’d like. Oftentimes, parents will use a reverse mortgage to pay off other debt, renovate their home, travel, get rid of an existing mortgage, or pay for necessary living expenses including healthcare costs.
- A reverse mortgage loan also becomes due when they pass away, no longer live in the home, or decide to sell the home. In addition to the loan amount, people must also pay any accrued mortgage insurance premiums, interest, services fees, and any other costs and/or fees that have been paid for through the loan amount. It’s important to note that permanently moving into a senior care facility is considered moving out of the home. If there is more than one borrower on the reverse mortgage, it becomes due when the last remaining borrower leaves the home.
- In order to repay a reverse mortgage, people have the option to sell the home, pay the loan off using personal funds and keep the home, to refinance the loan. For more information on any of these options, talk to a reputable lender. If parents or their heirs decide to sell the home or pay off the loan, any remaining equity is given to the homeowner or heirs, meaning an inheritance may still be in the cards.
Overview
A reverse mortgage is pretty simple. With a traditional mortgage, people borrow money to buy a home and pay a lender back over a fixed amount of time (the “loan term”). Also called a Home Equity Conversion Mortgage (HECM), a reverse mortgage is a type of home loan where a lender pays you. The lender converts a home’s value (called “equity”) and converts it into payments to borrower, like receiving an advance on the home’s value. These payments are usually tax-free, and most people do not have to pay the money back as long as they continue to live in their home. The loan must be repaid (called “payment due”) when the homeowner passes away, moves out, or sells the home. Also, if the taxes, insurance and or HOA dues are not paid this will accelerate the loan as well and become due
This type of loan is very regulated by the government and lenders are required to provide borrowers with information on all fees called the Total Annual Loan Cost (TALC) disclosure. The TALC includes the total costs over the loan term, which means a potential borrower will see all costs related to the loan.
Reverse mortgages are a non-recourse loan, meaning that the loan’s collateral is solely the home and property. As part of the reverse mortgage process, people pay a mortgage insurance premium to the U.S. Department of Housing and Urban Development which guarantees that the borrower will never have to pay back more than the value of their home when the payment becomes due. If heirs want to keep the home, they have two options. They can either pay the lesser of (1) the loan balance or (2) 95% of the home’s appraised value. With both options, heirs are also responsible for any closing costs and/or real estate commissions.
This information is not a substitute for legal, tax, or financial advice. For legal or tax advice, contact a qualified attorney and/or licensed accountant or financial advisor. Information contained is not provided by, or approved by, the Department of Housing and Urban Development (HUD) or by the Federal Housing Administration (FHA).
Some circumstances will cause the loan to mature and the loan balance will become due and payable. All borrowers are responsible for, and must continue to pay, property taxes and insurance. Additionally, borrower(s) must maintain the property to meet HUD standards or otherwise risk default. Credit is subject to factors including age, minimum income guidelines, credit history, and property qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
