It is hard to miss the never-ending ads targeted at seniors for reverse mortgages — and they make a reverse mortgage sound very attractive for senior citizens living on a modest fixed income. If you have been considering a reverse mortgage, you need to fully understand how one works. The Grand Forks elder law attorneys at German Law explain how a reverse mortgage works and how it might fit into your retirement financial planning.
What Is a Reverse Mortgage?
For seniors who have equity in a home, a reverse mortgage allows them to access some of that equity through a loan that uses the home as collateral. When you take out a reverse mortgage, the bank pays you instead of you paying the bank for the term of the mortgage. There are no restrictions on how the proceeds of a reverse mortgage can be used and you can receive the proceeds from a reverse mortgage in several different ways, including:
- Lump sum – a lump sum of cash at closing.
- Tenure – equal monthly payments while the homeowner lives in the home.
- Term – equal monthly payments for a fixed period.
- Line of Credit – draw any amount at any time until the line of credit is exhausted.
Imagine, your home’s current market value is $500,000 and you decide to take out a reverse mortgage for $200,000. Once you take out the reverse mortgage, the equity in your home decreases by $200,000 to $300,000 and that $200,000 mortgage loan must eventually be repaid. The actual amount you will be eligible to receive in a reverse mortgage will depend on several factors, including the age of the youngest borrower, current interest rate, appraised value of the home, and government-imposed lending limits.
Reverse Mortgage Eligibility and Repayment
To be eligible for a Home Equity Conversion Mortgage (HECM), the only reverse mortgage insured by the Federal Housing Administration (FHA), the youngest borrower on title must be at least age 62. If the home is not owned free and clear, then any existing mortgage must be paid off using the proceeds from the reverse mortgage loan at the closing. Additional financial eligibility criteria established by HUD will also apply to eligibility.
Usually, a reverse mortgage does not become due until the death of the borrower or until the borrower is no longer living in the home as his/her primary residence. In the meantime, you must abide by the terms of the loan by paying the required property taxes, keeping homeowners insurance current, and maintaining the home.
How Might a Reverse Mortgage Fit into My Estate Plan?
Taking out a reverse mortgage may have a significant impact on your existing estate plan if you planned to gift your home to your children (or another beneficiary) upon your death. When you die or stop living in the home as your primary residence for more than 12 months, a reverse mortgage loan will usually become due. Consequently, you (or your estate) must either repay the reverse mortgage or put the home up for sale to pay for the mortgage. If the home is sold, and the equity in the home is higher than the balance of the loan, the remaining equity belongs to you or to your estate.
On the other hand, if the sale of the home is not enough to pay off the reverse mortgage, the lender (not the borrower) must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage. This is important because it means that even if the sale of your home, after you are gone, fails to cover the amount owed to the reverse mortgage, your other assets (such as vehicles, investments etc.) are not at risk of being sold to repay the loan.
Contact Grand Forks Elder Law Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about a reverse mortgage or other elder law issues, contact the Grand Forks elder law attorneys at German Law by calling 701-738-0060 to schedule an appointment.