It seems like you can’t watch television for more than half an hour during the day without seeing at least one ad for reverse mortgage loans. Many older people who’ve lived in their homes for many years choose to get a reverse mortgage because it can provide them with a nice sum of money based on the equity in their home. The most common type is a Home Equity Conversion Mortgage (HECM).
As you consider whether a reverse mortgage is right for you, it’s crucial to consider how it will affect your estate plan and your heirs. Let’s look at how a HECM is handled when the last borrower or the eligible non-borrowing spouse passes away.
What are your heirs’ options for your home after you die?
Say you’re a widow with a reverse mortgage in your name. After you pass away, the balance of the loan becomes due. That means your heirs will be responsible for repaying the balance or 95% of the home’s appraised value – whichever amount is lower. If you owed more on the home than it’s currently worth, then your heirs wouldn’t be required to make up the difference.
Heirs often choose to sell the home to pay off the loan. However, selling a home with a reverse mortgage on it isn’t always easy. That’s why people with reverse mortgages often get a life insurance policy to provide their heirs with the funds they need to pay off the mortgage and then either keep or sell the home.
Heirs have a limited amount of time to decide what to do with the home and to ask for an extension if they need one. The loan servicer typically finds out about the borrower’s death, whether the heirs notify them or not. They’ll typically send a “Due and Payable” letter notifying them of their deadline for taking action.
If you’re thinking about getting a reverse mortgage, then it’s wise to consider what your heirs (or executor) will need to do with the mortgage after you’re gone. This includes weighing how getting a reverse mortgage will affect how many assets you can leave to heirs and other beneficiaries. You’ll be able to better hone in on the right decision for you by examining the pros and cons of a reverse mortgage.