If you take out a reverse mortgage, you can leave your home to your heirs when you die—but you'll 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.
The most popular type of reverse mortgage is FHA's Home Equity Conversion Mortgage (HECM). 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. You can also get a combination of monthly installments and a line of credit.
This kind of loan is different from regular “forward” mortgages because 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.
Generally, in order to get a reverse mortgage a borrower must:
Generally, you must repay the lender when one of the following events occurs:
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 because the property 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).
There are four options for those who inherit a home that's subject to a reverse mortgage.
1. Pay back the loan. (With a HECM, the heirs can choose to repay 95% of the appraised value themselves and keep the home. FHA insurance will cover the remaining loan balance.)
2. Sell the home and use the proceeds to repay the reverse mortgage. (With a HECM, the heirs can sell the home for the full amount of debt owed on the loan or an amount that is at least 95% of the current appraised value of the property.)
3. Deed the home to the lender.
4. Do nothing and let the lender foreclose.
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 might qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home.
You can learn more about reverse mortgages, as well as other available options for older homeowners, at AARP’s website at www.aarp.org/revmort. It's also recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.