The heirs of a reverse mortgage borrower are usually affected to some extent by the loan, and this can be seen in a couple of different ways, both positively and negatively.

Although children may be concerned about how a reverse mortgage may impact their inheritance, the loan can be liberating for all parties involved in the sense that it could prevent parents from needing to rely on their adult children for financial assistance.

How a reverse mortgage impacts inheritance

The most obvious impact, perhaps, is when the loan’s term ends. This happens when you leave your home or pass away, and the loan becomes due and payable.

In most cases, adult children (or other heirs or estate executors) become responsible for paying off the loan. This is usually done by selling the home, and this can become a big point of conversation regarding whether a reverse mortgage is right for you and your family.

Adult children may be unhappy with the prospect of having to sell your home, especially if it’s where they grew up, or if they have any sort of sentimental attachment to it.

They may also be resistant to the idea that much of your home’s value, once sold, will go toward repaying the loan rather than them as an inheritance.

The good news is that selling the home is not the only option. If your adult child or children wish to keep the home once you pass away, they have the option of repaying the reverse mortgage through taking out another mortgage or through independent means.

Another thing to note is that reverse mortgages through the Federal Housing Administration-insured Home Equity Conversion Mortgage (HECM) program are non-recourse loans. This means that even if your loan ends up exceeding your home’s value, you or your children will never have to pay back more than what your house is worth once the loan is due.

Financial stability and independence

If you do end up getting a reverse mortgage, your adult children could be impacted in another way: They might not need to assist you financially.

The economic downturn has helped spur what’s called the Sandwich Generation—millions of middle-aged adults who are being called on to support both their children and their aging parents.

There are nearly 10 million boomers over the age of 50 who are caring for an elderly parent, and a little more than one out of every eight boomers are simultaneously raising a child and providing some form of financial assistance to their parents, according to data from the National Association of Insurance Commissioners.

A reverse mortgage can be the difference between older homeowners needing to rely on their adult children for financial help, or remaining self-sufficient and independent through tapping into their home’s equity.

Is a reverse mortgage right for your family?

Even though your children may not initially embrace the thought of you drawing down your home equity and the impact that will have on their inheritance, they may come to appreciate a reverse mortgage’s benefits: allowing borrowers to use a safe product to tap their own resources in order to remain financially independent.

If you have any other questions about how a reverse mortgage may impact your adult children, or are interested in learning more, don’t hesitate to contact us or call 1-888-888-4834.

Source: http://www.naic.org/Releases/2012_docs/boomers_insurance_decisions.htm

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As the number of baby boomers entering retirement continues to grow, many are faced with the challenge of figuring out how to use their assets wisely. There are a wide range of considerations when planning for retirement, including figuring out where you want to live and how much money you need to retire comfortably.

While a reverse mortgage might not be the answer for everyone, more financial planners are including it as an option to help seniors age in place during retirement.

Reverse Mortgages and the Overall Financial Picture

A major part of retirement planning is assessing your expected costs of living, and how your monthly expenses compare with your monthly income, which could come from a variety of sources including reverse mortgage proceeds, savings, Social Security, investment proceeds, or a pension.

A federally-insured reverse mortgage, taken as a lump sum, monthly payments or line of credit (or some combination) may be able to improve your financial picture depending on your needs.

A lump-sum reverse mortgage could help eliminate the burden of monthly mortgage payments by paying off the remainder of your existing mortgage balance.

Choosing to receive reverse mortgage payments on a monthly basis instead could supplement your income to cover food, utility, or medication costs, along with your other expenses.

A line of credit, which grows over time, is a third option, and it can be used under the standard government reverse mortgage program, or under the new “Saver” product, which offers lower upfront fees and a lower amount that can be borrowed.

Regardless of the type of reverse mortgage, recent studies have shown an improvement in retirement preparedness for those who plan to take advantage of the loans as a comprehensive approach.

“The conventional wisdom holds that home equity, drawn upon in the form of a reverse mortgage or similar product, should be used as a last resort, only if and when the [retirement] account is exhausted,” wrote financial experts Sacks and Sacks, who recently conducted a study on reverse mortgages and financial planning, published in the February 2012 Journal of Financial Planning.

“This is a rather passive approach. We show that the probability of cash flow survival is substantially enhanced by reversing the conventional wisdom.”

Do You Want to Age in Place?

A 2010 AARP study reports that nearly 90% of people over age 65 indicate they want to stay in their home as long as possible and a reverse mortgage can help make that happen.

Using the equity from your home, you can make various repairs around the house, such as updating your kitchen, installing a new furnace, or repairing your roof.

The loan proceeds can also be used to install ramps, a stair lift or even an elevator, or to make bathrooms safer with accessible tubs/showers and well-placed grab bars.

Getting health care at home is also a growing trend that can be much more affordable than entering a designated retirement community, and reverse mortgage proceeds can also be used to help pay for in-home health care.

Medicare and Supplemental Security Income

Eligibility for certain means-tested benefits programs is something else to think about when considering a reverse mortgage and deciding what kind of payment system is best for you.

Because you must be at least 62 years old to qualify for this type of loan, many reverse mortgage borrowers are also at an age where they may qualify for benefits programs such as Medicaid or Supplemental Security Income (SSI). They’re both means-tested programs, meaning your income and assets are considered when determining if you qualify.

Reverse mortgage proceeds are not considered income, as you are simply drawing down your home’s equity.

However, if you have opted to receive a lump-sum payment from your reverse mortgage, and have those proceeds sitting in a bank account, those funds may be considered an asset and could affect your eligibility for Medicaid and SSI, according to a NeighborWorks, a national organization that provides reverse mortgage counseling to prospective borrowers. It’s important to talk with a tax advisor to ensure a reverse mortgage will not disqualify you from receiving current benefits.

Your Heirs and Estate

Before taking out a reverse mortgage, it’s important to understand the impact of a reverse mortgage on your family and estate. If you decide to take out the loan, it must eventually be repaid.

When you pass away or leave your home permanently, the loan becomes due. Often, your heirs will be left to repay the loan through the sale of the home. Often, there’s enough remaining home equity that your heirs could sell your house, pay back the lender, and keep any money that is left over.

Even if the loan balance exceeds the value of the home, your heirs will not be required to pay more than the home is worth. This is one of the biggest benefits of obtaining a reverse mortgage insured by the Federal Housing Administration.

If you do plan on leaving your home to your kids through a will, some financial planners suggest putting the home in a revocable trust (which allows for reverse mortgages, although irrevocable trusts do not), or setting up a transfer-on-death designation (TOD).

Doing either of these options allows heirs to avoid the cost of probate and federal estate taxes. Placing your home in a trust or having a TOD designation means that your assets will automatically transfer to a trustee or designated beneficiary upon your death, without having to go through the probate process.

Your beneficiaries will still be responsible to settle your debts and repay your reverse mortgage loan, but they won’t be faced with probate court costs.

How Does a Reverse Mortgage Fit Into Your Retirement?

There are many factors that play into retirement planning, and it’s important to learn how reverse mortgages could impact key considerations such as location, cash flow, and your beneficiaries.

If you’re interested in finding out more about how a reverse mortgage retirement plan could help make retirement possible for you, don’t hesitate to contact us

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This is a question that comes up with nearly every client of ours when discussing the option of a reverse mortgage. And there’s good reason for it. This loan is designed exclusively for older adults aged 62 or older. Seniors want to protect their estate and make sure that they are not making a decision that will harm their legacy when bequeathed to their heirs. So, what happens when the last surviving spouse passes away?

The lender is generally notified of a borrowers passing by the heirs / estate, by “death audit” service, which compares the lender’s database against other databases including the social security death index, or other methods available. Once the lender has confirmed the death of the last surviving spouse, a letter is sent to all known heirs. The letter acts as a repayment notice that informs the estate / heirs that the mortgage is due and payable as well as all of the options available for satisfying the loan obligation, which are:

1. Pay the debt in full;
2. Sell the property to an unrelated third party for the lesser of the debt, if any, or 95% of the appraised value;
3. Complete a deed in lieu of foreclosure (this is when the estate / heirs signs the property back to the investor); or
4. Walk away from the property, which would result in foreclosure.

It’s important to remember that a reverse mortgage is a “non-recourse” loan, which means that the property stands for itself. This means that if the loan balance has grown beyond the value of the property, the heirs / estate could just sign a deed in lieu of foreclosure with no negative effect on their financial standing. On the flip side, if there’s still remaining equity, the heirs / estate can sell the home or satisfy the lien by any other method available to them and retain whatever equity remains after the debt has been satisfied.

The heirs / estate have up to one year to sell the property or payoff the loan. This can be accomplished only by constant communication with HUD and the lender. Per HUD Handbook 4330.1, “If the estate is making reasonable effort to sell the property, extensions should be granted in 3-month intervals with the entire process not to exceed 12 months.

To summarize, dealing with death is not an easy subject, but it is of utmost importance to seniors and their heirs / estate to understand every facet of reverse mortgages including what happens after the last surviving spouse passes away. In the words of Mahatma Gandhi, “Live as if you were to die tomorrow. Learn as if you were to live forever.”

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