Your home may be one of the single most important assets that you own. A reverse mortgage is a loan that can help supplement your retirement income and even help you hold onto this asset. You don’t have to pay off this loan as long as you live, and as long as you stay in this home. Sounds too good to be true? Be sure to understand what happens to a reverse mortgage after death. Although it may sound appealing at first, this type of loan can have a significant impact on your estate plan and your heirs. Keep reading to learn about what happens to your reverse mortgage after you pass away, and important factors to consider in the context of your estate plan.
What Happens to Your Reverse Mortgage After You Die?
Many retirees find themselves in a reality where their retirement income is insufficient. If you’ve built up a good amount of equity in your home, then you could qualify to take out a loan against that equity in the form of a reverse mortgage. The more you borrow, the more you lose your home equity. If you’re not familiar with what a reverse mortgage is or how it works, start here.
One of the most appealing characteristics about a reverse mortgage is that you don’t have to make any loan payments as long as you live and don’t sell the house that you live in. However, there’s no such thing as free money. When you pass away, the balance of your reverse mortgage becomes due and payable. How should this debt be paid, and who should pay it? This depends on who you designate as your heir in your estate plan.
If your spouse inherits your home
There’s good news here. If you have arranged your house deed and estate plan such that your spouse will inherit your home, they may be able to stay in the home and continue receiving your reverse mortgage benefits. This depends on the category that they fall in.
A spouse listed as a co-borrower on your original reverse mortgage loan documents can stay in the home and continue receiving the money from the reserve mortgage.
Your spouse may also qualify as an eligible non-borrowing spouse. If they didn’t originally qualify as a co-borrower, they can still be listed as an eligible non-borrowing spouse. This typically happens when your spouse was under the age of 62 when you took out the loan.
There’s also a chance that your spouse could be ineligible. If they don’t meet the requirements for one of the two prior categories, they will have to either sell the home or turn it over to the lender. If they want to continue living in the home, they have to buy the home.
For co-borrowing and eligible non-borrowing spouses, the home and the reverse mortgage both become part of their estate when they pass away.
If someone other than your spouse inherits your home
If you choose to bequeath your home to someone who isn’t your spouse, such as your children, they unfortunately cannot keep the reverse mortgage. The balance of the loan becomes due and payable at the time of your death, and they have to pay it off within a specific time frame. Here, they usually have three choices:
Sell the home
Buy the home
Turn the home over to the lender
They can sell the house and use the proceeds to pay off the reverse mortgage. If the home value increases relative to the mortgage, they get to pocket the remaining equity. If they prefer to keep the home, they’ll have to pay off the reverse mortgage using a different source of funds. Last but not least, they also have the option of turning the house over to the lender and walking away. This is called a deed in lieu of foreclosure.
Your Reverse Mortgage and Estate Planning - What You Should Consider
As you might have imagined, taking out a reverse mortgage greatly impacts one of the single most important assets in most individuals’ estate plans. If you’re considering taking out your reverse mortgage, you should also be thinking about how it will impact your estate and your ability to pass your home to loved ones. Here are some questions you should be asking yourself.
Do you have other assets of value?
A reverse mortgage is often appealing to a senior who doesn’t have any other assets of value. If they don’t have a retirement account, investment account, or other type of savings, then it often means their home is their only asset of financial value. In other words, taking out a reverse mortgage could be a last resort for them.
However, if you do have any other assets of value, then it may make more sense to draw from them rather than from your home equity. If you know that your heirs would like to inherit your home, then you’ll likely want to avoid creating a large balance on the mortgage.
To the contrary, taking out a reverse mortgage could be the tool you use to protect your other assets of value. Let’s say that your heirs don’t feel all too attached to your home. Borrowing against your home equity can be a great way to draw supplemental income while preserving your other assets. Further, it could be a tool to supplement your income and cover costs when there’s a downturn in the economy. If you’d be otherwise forced to sell your investments when prices are down, a reverse mortgage could be a smart choice.
Are you planning to pass your home to your heirs or not?
Another factor to consider is whether or not you’re planning to pass the home to your loved ones. If no one in your family has a particular attachment to the home, then you can typically take out a reverse mortgage with little resistance and repercussions. After you pass away, your heirs would simply sell the home or turn it over to the lender.
If your loved ones do want the home, however, then you’ll need to take extra precautions. Here, it matters who stands to inherit the home. If your spouse is the heir to your home, chances are, they would be eligible to stay in the home and continue receiving your reverse mortgage benefits. The reverse mortgage would then become a part of their estate. The outcome is much different if your heir is anyone other than your spouse. When you pass away, the balance of the mortgage is due and typically must be paid off within a short time frame. If your heirs wish to keep the home, then they’ll be forced to pay off the loan using a different source of funds. This impacts the size of their inheritance if the loan balance is paid using other estate assets.
Could a reverse mortgage help you protect your other assets?
Yes. Discussed earlier, a reverse mortgage can be a creative solution to protect your other assets in certain circumstances. Let’s say that the economy takes a downturn, and the value of your investments begin to fall. Because of these economic circumstances, you need supplemental income. Being forced to sell off your assets could hurt you in the long-run, because you are selling them when prices are low. Instead, you could take out a reverse mortgage to secure the money you need without having to sell your other assets. This could help protect the size of your estate over the long-run.
Do you have life insurance?
If you wish to protect your estate and your heirs, you could mitigate the potential issues to be caused by a reverse mortgage by taking out a life insurance policy.
After you pass away, your heirs must pay off your reverse mortgage if they wish to keep the home. However, they are permitted to use any other source of funds they might have access to. This includes proceeds from a life insurance policy.
Here, be careful to compare the amount of life insurance you’ll have relative to the size of your debts. In some cases, purchasing a life insurance policy might not make sense. If you buy it later in life, you may not be able to pay into it long enough such that the reverse mortgage can be paid off. For estate planning purposes, it’s beneficial to take out a life insurance policy that you can pay into for at least several years.
Is a reverse mortgage a good idea?
The bottom line is that a reverse mortgage impacts how much of your home value you can pass on to heirs. The larger your mortgage, the less equity you’ll be able to bequeath to loved ones.
A reverse mortgage can be a good idea if you don’t have better options to supplement your retirement income. There is a cost of living, and we can never get away with that. There can be times when the need to offset costs is more dire relative to preserving the equity you’ve built up in your home. There can also be times when taking out a reverse mortgage is the pathway to protecting other assets that are more valuable to you and your heirs.
Your personal circumstances and your intentions behind taking out a reverse mortgage influence whether or not it is a good idea. If the benefits of taking out the loan to access cash outweigh the possible downsides, then it can be a great tool. It may be advisable to consult a financial professional to review your options before taking out a reverse mortgage.
Learn more about reverse mortgages
In this guide, we explained what happens to a reverse mortgage after death. The person who you choose to bequeath your home to matters. If it’s your spouse, then chances are, they will be eligible to continue living in the home and benefiting from the reverse mortgage. The home and mortgage then become a part of their estate to pass on. If the heir is a loved one other than your spouse, such as a child, then the mortgage becomes due upon your passing. They have three options, including buying the house, selling it, or transferring the deed to the lender.
A reverse mortgage impacts your home equity, and thus the value of your estate. In the context of estate planning, taking out a reverse mortgage impacts how much equity you’ll be able to pass down to your heirs. As explained above, if you bequeath your home to a loved one who isn’t a spouse, they might be forced to buy or turn over the home. If they are attached to your home and wish to keep it in the family, then the reverse mortgage may not be the answer. Otherwise, they might be forced to buy it using their own funds.
To learn more about reverse mortgages, be sure to check out our other guides:
Update your estate plan today
Less and less Americans are able to save up enough money for retirement, if at all. This means that when they reach retirement, various sources of income may not add up enough to cover the costs of living. Further, there could be additional or unforeseen costs, such as long-term health care.
As a homeowner, the home may be one of the single most assets of value. Instead of being forced to sell the home for cash, a reverse mortgage could be the answer to aging in place and supplementing your income to cover costs. It could also prevent you from being forced to sell other assets when you don’t want to.
Carefully planning your estate is an essential activity that helps you look into the future, rather than what’s directly in front of you. If you’re considering taking out a reverse mortgage, then it’s likely a sign that you need to review you and update your estate plan. Don’t know how? Don’t have an estate plan yet? Not to worry! We’ve got you covered.
At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Once you have your plan established, we make it easy for you to maintain, review and update it. That way, you can rest assured knowing that you’re covered, no matter what you decide. Take our free quiz to see where you should get started, or compare our different estate planning options today!
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