Reverse Mortgage is an ideal way to stay prepared for retirement. If you are thinking of taking out a mortgage on your home, be rest assured that it will affect your estate planning in some ways. Reverse mortgages allow individual age 62 or above to leverage the equity in their homes and pay for retirement expenses. They act as a loan of the equity amount to the homeowners.
What is actually a reverse mortgage? How can it affect your estate plan? Those are the questions we are going to address in this article. First off, let us take a look at what a reverse mortgage is.
What is a Reverse Mortgage?
A reverse mortgage is simply a loan that let homeowners ages 62 and above, who have settled their mortgage, to borrow a portion of their home’s equity as tax-exempted income. Unlike a normal mortgage in which the homeowner makes payment to the creditor, with a reverse mortgage, reverse is the case.
Homeowners who consider this kind of mortgage don’t have a monthly payment and don’t have to sell their home (put differently, they can continue to stay in it). However, the loan must be paid back when the borrower kicks the bucket, permanently moves out or decides sell the home.
There are several types of reverse mortgage. However, one of the most common of them all is the Home Equity Conversion Mortgage (HECM), which is funded by the Federal Government.
Uses of a Reverse Mortgage
A reverse mortgage proceeds can be used for supplementing retirement income, covering the cost of required home repairs or paying out-of-pocket medical expenses
Can a Reverse Mortgage Affect Estate Planning?
Of course a reverse mortgage can affect your estate plan in a few ways. You See, to receive a reverse mortgage you must be 62 or older and you must:
- Have complete ownership of the home
- Occupy the home as your main residence
Reverse mortgage works in a simple way: you receive a lump sum payment, a monthly payment, or a home equity line of credit as proceeds of the loan. In return, the lender will assess interest and will demand payment of the loan if specific events take place. These events are:
- Sale of the house or title transfer
- The borrower no longer uses the home as main residence for 12 straight months or more; or
- The borrower fails to remit proper try taxes or meet other upkeep requirements
Upon the death of the borrower, the lender will take possession of the home. The borrower’s estate will not include the home’s value. If there exist any leftover equity in excess of the reverse mortgage amount, it goes to the borrower’s heirs. This equity is considered as part of the estate for tax reasons.
When considering whether to take out a reverse mortgage, consider whether you may relocate to a different main residence (like a retirement home or long-term care facility) at some point moving forward. The loan will have to be paid after you relocate, and you might not be able to afford repayment and interest.
If you choose to take out the mortgage, ensure you remain in your house. In addition, you cannot take out a reverse mortgage on a vacation or second home. The home must be your main residence.
Further, consider whether your children want to retain the house after you death. With a reverse mortgage, they would have to settle the loan balance, either by refinancing or with another method. Aside from settling the loan balance, they might also decide to sell the home. However, before doing so, they would need the go-ahead of the lender and would have to make a very fast sale, often losing value.
But, if the home sells for less than the loan amount, then the heirs don’t have to pay the difference (this is regarded as non-recourse loans). Also, heirs don’t have to pay taxes on the sale proceeds when the home is subject to reverse mortgage.
Contact our office if you have questions regarding a reverse Mortgage, or if you need the help of an attorney in setting up a reverse mortgage. Our attorneys are experienced and versed in matters reverse mortgage and can help in ensuring that it doesn’t affect your estate plan significantly.