Planning Estates with Reverse Mortgages

Vikki Velasquez, a seasoned researcher and writer, has dedicated her career to managing, coordinating, and directing various community and nonprofit organizations. She has conducted comprehensive research on social and economic issues affecting communities. Additionally, she has revised and edited educational materials for the Greater Richmond area. 
 
In this article, Velasquez discusses reverse mortgages, a financial tool that allows homeowners to tap into their home equity without having to sell their homes. However, it is crucial to remember that money received from a reverse mortgage must be repaid after the owner's death, which can significantly reduce the estate’s value. 
 
When you pass away, leaving behind a house with a reverse mortgage attached to it, your heirs will inherit both your property and the responsibility of the mortgage repayment, depending on their relationship with you. 
 
Spouses who inherit properties under these circumstances could fall into three different categories, determining whether they have rights over remaining in the home or continuing benefits from reverse mortgages. For co-borrowing spouses or eligible non-borrowing spouses, when one dies, the other inherits both homes along with their attached reverse mortgages. This applies specifically to FHA-insured HECMs that originated on August 4, 2014. 
 
On the contrary, if heirs are not spouses but children or others, they cannot continue benefiting from existing reverse mortgages but instead must pay off within a stipulated time frame, giving them three options: 
 
1) Pay off the loan balance. 
2) Sell property. 
3) Turn over property deeds back to the lender. 
 
Regardless of how much is owed on an HECM, the maximum obligation by heirs would be the full loan balance amount or 95% of the appraised value, whichever is less, thanks to FHA insurance covering any difference between the two amounts. 
 
Heirs may need quick action since technically they only have 30 days after receiving the due and payable notice, although extensions up to a year can be requested, allowing enough time to arrange financing for buying property themselves or selling it off completely. 
 
Velasquez also discusses an online suggestion of using reverse mortgage proceeds to buy life insurance payable to heirs, providing them with sufficient cash to purchase the home after your death. However, this may not be feasible for everyone, as they might need all the money from reverse mortgages to cover living expenses, leaving no surplus for life insurance. 
 
People who lack retirement accounts or non-retirement investment accounts and have their homes as the only substantial financial asset find reverse mortgages most appealing. If you are aware that your heirs would prefer inheriting your house, then drawing income from other assets could make more sense than accumulating a large balance on a reverse mortgage. 
 
Author Wade Pfau suggests having a reverse mortgage is one way to protect other assets in times of bear market. Instead of selling investments when prices are down, you can use money from a reverse mortgage till prices rise again, but it comes at the cost of the steep upfront costs associated with getting one. 
 
A crucial point here is that if you ever face major long-term care costs, a reverse mortgage might help protect your other assets, but remember that the loan needs to be repaid if you move into a care facility for 12 consecutive months or more, unless there's an eligible co-borrowing spouse occupying it. 
 
In conclusion, Velasquez emphasizes that while homes represent significant parts of estates and having attached reversed mortgages will affect how much value heirs receive upon the owner's demise, supplementing income via these mechanisms can help preserve additional financial assets within the estate. As such, discussions about potential scenarios should happen well in advance, ensuring appropriate planning and understanding by all parties involved.