If you take out a reverse mortgage, you can leave your home to your heirs when you die, but you will leave less of an asset to them. Also, your heirs will also need to deal with repaying the reverse mortgage otherwise the lender will foreclose.
A reverse mortgage is a particular type of loan that allows older homeowners to convert some of the equity in their home into cash in the form of a lump sum (subject to some limitations), monthly amounts, or a line of credit, or a combination of these options.
This is different from regular “forward” mortgages since with a reverse mortgage, the lender makes payments to the homeowner, rather than the homeowner making payments to the lender. Because the homeowner receives payments from the lender, the homeowner’s equity in the property decreases over time as the loan balance gets larger.
Who’s Eligible for a Reverse Mortgage
Generally, in order to get a reverse mortgage a borrower must:
- be at least 62 years of age
- occupy the property as his or her principal residence, and
- have substantial equity in the property (or own the home outright).
When You Have to Repay a Reverse Mortgage
You must repay the lender when one of the following events occurs:
- you die
- the home is no longer your principal residence (or you move out due to health reasons for 12 months or longer)
- you sell the home (or transfer title), or
- you default on the terms of the loan (such as by failing to keep up with insurance premiums or property taxes). (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
What This Means For Heirs
When a person with a reverse mortgage dies, the heirs can inherit the house, but they won’t receive title to the property free and clear since it is subject to the reverse mortgage.
For example, say the homeowner dies after receiving $150,000 of reverse mortgage funds. This means the heirs inherit the home subject to the $150,000 debt (plus any fees and interest that has accrued).
Options for Your Heirs
There are four options for those who inherit a home that is subject to a reverse mortgage. They can:
- pay back the loan
- sell the home and use the proceeds to repay the reverse mortgage (see Home Equity Conversion Mortgages, below)
- deed the home to the lender, or
- do nothing and let the lender foreclose.
Home Equity Conversion Mortgages
The Federal Housing Administration (FHA) insures most reverse mortgages, as part of its Home Equity Conversion Mortgage (HECM) program. (Learn more about HECMs at www.hud.gov.)
With a HECM, the heirs can satisfy the loan by selling the property and paying the lender the lesser of:
- the outstanding loan balance, or
- 95% of the home’s appraised value. (The heirs can also choose to repay 95% of the appraised value themselves, if they do not want to sell the home. FHA insurance will cover the remaining loan balance.)
Be Sure to Explore All Options Before Taking Out a Reverse Mortgage
Reverse mortgages are complicated and are not always the best option for older homeowners seeking access to extra cash. Before taking out a reverse mortgage and tapping into your home equity, you should be sure to explore all of the options available to you. For example, you may qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home. (Learn more about reverse mortgages, as well as other available options for older homeowners, at AARP’s website at www.aarp.org/revmort.)