Last week, we discussed the basics of reverse mortgages for senior homeowners. Here, we’ll look at how these loans can impact your family legacy wealth.
effect on your family
If you take out a reverse mortgage, you can still leave your home to your family in your estate plan. However, you’ll not only leave your loved ones a less valuable asset, but they’ll also have to pay off the balance of the loan after you die, otherwise the lender will foreclose.
Whomever inherits your home will typically have six months to pay off the reverse mortgage. And they should move as quickly as possible because until the loan is settled, interest on the balance and monthly insurance premiums will continue to eat into any remaining equity.
Unless your family has enough money on hand to fully pay off the reverse mortgage upon your death, they may end up having to sell the home. If so, the proceeds from the sale can be used to pay off the loan (including all fees and interest), and your family keeps any remaining equity. This is the best-case scenario.
The effect on your legacy
While reverse mortgages are designed to stay within the equity value of your home, this only works if home values are rising. If home values crash, like they did during the last recession, the balance of your reverse mortgage could end up exceeding the market value of your home.
The good news is reverse mortgages are “non-recourse” loans insured through the Federal Housing Administration (FHA). This means your estate won’t ever owe more than the home’s appraised value, and lenders can’t come after your family or estate to recoup their loss. If your reverse mortgage balance exceeds your home’s value at the time of your death, your estate is only responsible for paying the lender 95% of the home’s appraised value.
For example, let’s say your home is appraised for $100,000, but the reverse mortgage balance is $200,000. To keep the home, your trustee – you do have a living trust, right? – would need to pay $95,000 of the $100,000 appraised value. Federal mortgage insurance covers the remaining amount.
Lenders, however, still make back their money. If your home’s sale doesn’t meet the lender’s expenses, an FHA fund insuring the loan pays the difference. This fund is currently more than $13.6 billion in the red, which reflects just how risky reverse mortgages can be.
The bad news for your legacy is that the family trust would lose a major asset and be left with nothing to show for it. Given this, unless there’s equity in the home, your Trustee would have little incentive to sell the property and may want to simply hand it over to the lender to avoid the time and expense of foreclosure. Known as “deed in lieu of foreclosure,” your Trustee can do this by signing the home’s deed over to the lender.
effect on your wealth
Obviously, do your due diligence before taking out a reverse mortgage. But if you already have a reverse mortgage on your home, it’s critical that your Successor Trustee knows about it. In either case, I’m a big proponent of meeting with your trusted advisors to discuss the potential impact on your loved ones’ future.
And, before you make any major life decision, especially one involving real estate, you should speak to your personal family attorney about your legal options. Proactive planning can substantially grow your assets now and significantly protect your wealth for the next generation.
Dedicated to empowering your family, building your wealth and defining your legacy,