What is reverse mortgage?
Reverse mortgage is a type of loan where by the value of a home is given in cash to a borrower. The borrower is usually an elderly person at the least age 62. This loan does not require a monthly payment rather, the payment will be after the death of the borrower or when he or she moves out of the home. While the borrower is still in the home, he or she is responsible for the taxes of the home. A reverse mortgage loan is very beneficial to elder people as it has many benefits. But in the other hand, it is important to note that it can affect an estate plan in some ways.
Some benefits of a reverse mortgage loan include:
- You remain the owner of your home
When compared with the option of selling, reverse mortgage though being a loan, is way better than selling. When you decide to sell your home, you lose ownership of the home, and you start making provision for a new home etc. But with reverse mortgage, you get to keep and remain in this home as the owner till death eventually comes knocking.
- Security after retirement
Another upside to reverse mortgage is that at your retirement, you get to be earning gradually from the equity of your home. Most older folks suffer a decline of their asset after retirement as they pay mortgages. But with a reverse mortgage, instead of spending you will be receiving
With reverse mortgage, you are free to spend your money whichever way you please and choose to. There is no binding or restricting law limiting the way and manner with which you spend your money.
How reverse mortgage affects estate planning
Most people wish to leave behind an asset for a loved one when they die. If you are one of such persons then you have to think twice before engaging in a reverse mortgage loan. A reverse mortgage loan won’t allow you leave behind your home for a dear one. Except the heir is going to pay the loan and reclaim ownership from the lender. This might be a stressful task for your heir. So it is important to consider the option of willing your home to a loved one before opting for a reverse mortgage loan.
It is still possible for your heir to decide to pay back the loan by selling the home. In this case, they might sell the home below the value of the loan. This does not matter as they won’t be required to pay the balance because reverse mortgage is a form of a non-recourse loan.
But there are some ways you can help mitigate the challenges your heirs may face due to a reverse mortgage.
- Life insurance
You can take out life insurance using the funds you receive from the mortgage payment. You can then name the beneficiary of the home also as the beneficiary of the life insurance so that they can use the proceeds to pay off the loan.
Another way to carry your estate planning along with reverse mortgage is to gift the funds you receive to your loved ones during your lifetime. With this method, however, you can no longer use the funds for your retirement expenses, which is the primary objective of reverse mortgage.
It is also important to put into consideration your plan for your long term care. This is because if you plan to move to a nursing home for long term care, then reverse mortgage is not the best option for you. When you move out of your home to a nursing home, it triggers repayment of your reverse mortgage loan. This is OK if you have enough cash to pay, but it poses a problem when you don’t have enough cash to settle the debt.
Also, when you are out of your home you won’t be paid the reverse mortgage loan as it is not possible to get payments on someone else’s home.
Technically speaking, when planning your estate, the value of a home on reverse mortgage cannot be included in your estate.
Seeking help and professional advice from an attorney is the best way to avoid making mistakes which could ruin your estate plan. To get such advice and assistance from an attorney in New York simply contact us and we will help you plan your estate.