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How does a reverse mortgage affect your heirs?

How does a reverse mortgage affect your heirs?

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A woman in Florida chose to sign over the rights to her home to her husband, which would enable him to qualify for a higher reverse mortgage loan amount.

According to the Buffalo News, the 62-year-old man took died shortly after taking out the loan. As chief among the man’s heirs, the wife inherited the home but had trouble getting her name on the deed. The loan requirements mandated that she qualify for a refinance in order to pay back the reverse mortgage, which is something she struggled to do.

It is imperative that people in Illinois and across the country understand how opting for a reverse mortgage can affect their heirs.

What is a reverse mortgage?

Seniors who are 62 or older could qualify for the process, which allows them to convert equity in a home into cash. Instead of a traditional mortgage in which homeowners make a monthly payment, a reverse mortgage means lenders are paying the homeowners. The lenders are then paid back when one of the following occurs:

  • The home is sold
  • The homeowner dies
  • The home is no longer the owner’s primary residence

As the Federal Trade Commission notes, many people enjoy the option of a reverse mortgage because the proceeds are tax-free and typically do not have income restrictions. However, depending on the terms of the loan and when the homeowner dies, people who utilize this option could leave their heirs with some difficult decisions.

Plan accordingly

Seniors who opt for a reverse mortgage may still leave their homes to whomever they choose through their estate planning. According to the Consumer Finance Protection Bureau, heirs who inherit a home with a reverse mortgage will essentially have two choices. If they want to keep the home, they will have to pay off the loan balance. In many cases, this can be done through refinancing or using other assets in order to make the payment. Refinancing will require that the heir meet the requirements of a traditional mortgage, which can include having a stable income and solid credit score.

The other option is for heirs to sell the home, keeping any money leftover after the reverse mortgage is paid in full. Fortunately, if the home is worth less than the balance on the loan, heirs will not be responsible for paying anything more than what they receive from the sale of the house. The CFPB points out that if a senior chose to get a Home Equity Conversion Mortgage loan through the Federal Housing Authority, heirs may only have to pay 95 percent of the appraised value of the home.

In any case, it is important for people taking out a reverse mortgage to factor it into their estate planning and alert their heirs. Planning can help prevent any unnecessary surprises and stress.

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