Reverse mortgages can be complicated to understand. If you have inherited a house that has one, it is important to make sure you understand what they are, how they work, and what you will be responsible for.
Reverse mortgages use available equity in a home to help with everyday expenses, and these become payable once the owner of a home passes away. If someone inherits a property with a reverse mortgage, then they have the option to keep the property and pay off the loan or sell the property.
If you want to understand more about reverse mortgages and how they can impact an inheritance, you will read the sections below. The contents of this information are general, and when dealing with any type of lending it is important to always seek legal advice to make sure you are informed on all your options.
How Reverse Mortgages Impact Inheritance?
A reverse mortgage can impact a person’s inheritance because there is a loan on the property. This causes less equity available in the house, resulting in less money to be inherited because that money needs to be paid back. However, depending on who the inheritors are there can be different options.
Spouse Inherits Reverse Mortgage
If you have a spouse that was not on the original loan after someone passes away then there are important things to consider. For example, the spouse can still live on the property, but they will need:
- to continue to pay taxes
- maintain the property
After the guarantor passes away, a spouse that was not on the loan will no longer be eligible to receive money from the reverse mortgage. However, the loan will not need to be paid back until the spouse:
- sell the home
- no longer live there as a principal residence
Check with your real estate attorney to see how this affects you.
Non-Spouse Inherits Reverse Morgage
For other inheritors of an estate, the rules are different. The loan will need to be paid back upon the death of the guarantor/s. However, depending on the type of agreement you have the amount that needs to be paid back can be different.
Most reverse mortgages have a “non-recourse” clause, which means that someone can’t owe more than the home’s value. If the inheritors don’t want to keep the house, they can either sell the home to pay back the loan or, in some cases, even walk away by giving it back to the bank.
If the inheritors want to keep the home, they can generally do so without paying over what the house is worth. They can do this by either paying cash, using an existing loan under their name, or getting a new loan on the property with the reverse mortgage.
Regardless, if the inheritors of the home want to sell or keep the house, to do anything, they will want to make sure they have the title in their name. They will also want to work quickly to ensure no negative actions are taken like foreclosure or additional fees.
How Does a Reverse Mortgage Work?
Homeowners can be eligible to leverage available equity in their homes to help supplement income: like paying bills, healthcare costs, or other expenses. This use of funds is available to people over the age of 62 in the United States.
Essentially, a reverse mortgage is the opposite of a traditional mortgage. Unlike a traditional mortgage, the borrower doesn’t make a payment to their lender every month. Instead, they receive deposits from their lender and don’t have to make any loan payments on those borrowed funds unless one of the following situations were to occur:
- the homeowner/s passes away
- they sell their house
- they move out
If any of these situations happen, then the homeowner, a spouse, or their estate would need to pay back the loan or relinquish the property.
It is important when taking out any type of loan that the terms and conditions of the loan are fully understood. With reverse mortgages some important things to consider and understand are:
- what are the impacts on taxes?
- what are the fees and costs?
- is the interest rate fixed or variable?
- what costs are you still responsible for as a homeowner?
- how can this impact your spouse?
- how will this affect money left to heirs?
All of these are important questions to ask, do your research on, and shop around for the best options.
Whether you are looking to get a reverse mortgage or have inherited a home with a reverse mortgage, it is always important to make sure you take the time to understand all your options.
For instance, if you need additional funds, there might be alternative lending products that better suit your needs (ex: home equity loans, personal lines, etc.). If you are the person inheriting the estate, then you also have options depending on whether you choose to buy or sell the property.
The choice is always yours. Just make sure to consult with experts, do research, and make sure you are dealing with a credible company.