What happens to the reverse mortgage and the family home after the borrower passes away is a crucial question that many borrowers and their heirs have when thinking about a reverse mortgage. Given that reverse mortgages are frequently seen as the last loan a homeowner may require and are intended to enable them to access their home equity while permanently freeing them from monthly mortgage payments, this concern is especially important.
The age of the youngest borrower has the biggest impact on the amount of a reverse mortgage, also referred to as the eligible principal limit. This figure is determined from the home’s value, HUD lending limits, and the current interest rates. It is not uncommon for borrowers and their families to be concerned about possible modifications to the loan, particularly when one of the borrowers—regardless of age—dies first.
Navigating the complexities of a reverse mortgage after the borrower’s death can be confusing for heirs, This guide explores the options available and answers the question: can heirs simply walk away from a reverse mortgage?
Understanding Reverse Mortgages
With a reverse mortgage, homeowners 62 years of age and above can access their equity without having to make monthly payments. Interest is charged on the loan over time, and the remaining amount is due when the borrower passes away or moves permanently.
Heir Options After Borrower’s Death
When the borrower passes away, the heirs have three options:
- Repay the loan and keep the home: Heirs can choose to repay the loan in full, either with their own funds or by refinancing with a new mortgage. This allows them to retain ownership of the property.
- Sell the home and repay the loan: Heirs can sell the home and use the proceeds to repay the loan. If the sale price exceeds the loan balance, they keep the remaining equity.
- Walk away from the home: Heirs can choose not to repay the loan and relinquish the property to the lender. This option is available because reverse mortgages are non-recourse loans, meaning the borrower’s estate is not liable for any debt exceeding the home’s value.
Walking Away: Implications and Considerations
While walking away seems straightforward, there are crucial factors to consider:
- Loan balance: If the loan balance exceeds the home’s value, heirs are not responsible for the difference. However, they forfeit any equity in the property.
- Communication with the lender: Promptly informing the lender of the borrower’s death is essential. This allows the lender to initiate the repayment process and guide the heirs through their options.
- Timeframe for action: Heirs typically have 30 days to decide on a course of action after receiving the loan due notice. However, extensions may be granted in certain circumstances.
- Legal and financial guidance: Consulting with an estate attorney and financial advisor can provide valuable insights and ensure informed decision-making.
Additional Resources
- Consumer Financial Protection Bureau (CFPB): https://www.consumerfinance.gov/ask-cfpb/with-a-reverse-mortgage-loan-can-my-heirs-keep-or-sell-my-home-after-i-die-en-242/
- Reverse Mortgage Lenders: https://reverse.mortgage/death
The choice to leave a property with a reverse mortgage is available to heirs, but it’s important to weigh the pros and cons and look into other options. Facilitating expert consultation and efficient communication with the lender guarantees a seamless and knowledgeable decision-making procedure.
FAQs
Q: What happens if the loan balance is more than the home’s value?
A: Heirs lose any equity in the property but are not responsible for the difference.
Q: How long do heirs have to decide what to do?
A: Typically 30 days, but extensions may be granted.
Q: Should heirs consult with professionals?
A: Yes, an estate attorney and financial advisor can provide valuable guidance.
Q: Where can heirs find more information?
A: CFPB website and reverse mortgage lenders.
How Interest Accrues on Reverse Mortgages
Interest accrues only on the money you borrow. Borrowers of reverse mortgages are authorized for a maximum loan amount, known as the Principal Limit; however, you are in complete control of how you use the funds and how quickly interest accrues under the program. The more money you borrow and the earlier in the loan, the more interest will accrue. (Receive a free calculation here. ).
Instead of taking out a sizable lump sum at the beginning of the loan, borrowers who want to leave the greatest amount of inheritance to their heirs should aim to borrow as little as possible and spread that borrowing over time.
For instance, borrowers who get a reverse mortgage through the line of credit or payment option but do not take out large sums of money right away or just a little amount every now and then will not pay interest as quickly as those who take out a lump sum draw on the full amount.
This guarantees that the loan will accrue the least amount of interest and that, upon repayment, the balance will be as low as possible. If a borrower has no heirs or no heirs they are concerned about leaving their home, they may want to be able to use the proceeds now to improve their lives. These borrowers are simply trying to pay off an existing loan so they can stay in their home.
Either way, it is your home, equity, and choice. Everyone must remember that property values will also significantly determine the equity left. If property values continue to rise, it certainly helps ensure that there is equity to leave to heirs.
But, in the event that values drop, as they would if you had a forward loan, family members would have less equity accessible in the event that you pass away and have already spent all of your loan proceeds. However, that is the purpose of the loan—to allow you to use your equity however you see fit.
You can preserve your equity for future generations if you don’t need the money to survive, but if you do, the loan will allow you to stay comfortably in your house without having to make payments.
Reverse Mortgages Aren’t Much Different from Traditional Loans
Reverse mortgages, as their name suggests, have no monthly principal or interest payments, unlike traditional or “forward” mortgages. Interest and other fees are accumulated on the loan and are not due and payable until the last borrower vacates the property permanently (12 months or more).
Therefore, you receive funds from the loan (monthly, as a line of credit, in bulk sums, or a combination of some or all of these options) in place of making a monthly payment to lower the amount you owe on a loan. Your balance owed grows over time as you accrue interest and borrow money.
Furthermore, although there is never a payment due on a reverse mortgage, there is also no prepayment penalty. As a result, borrowers are free to choose to make payments at any time and in any amount, without incurring penalties, but they are not obligated to do so until the home is sold or they vacate it permanently.
However, the borrowers are still responsible for paying taxes, insurance, and the upkeep of their homes. It’s crucial to keep in mind that this requirement is the same as on a forward mortgage and that failing to pay these assessments constitutes a default under the terms of the loan.