Modern reverse mortgages are designed to maintain a substantial amount of equity in the home. In most situations home equity also continues to grow over time as the home’s value increases. It is important to know your options at the end of a reverse mortgage.
There are three primary options at the end of a reverse mortgage:
The Borrower Sells the House.
Selling a home with a reverse mortgage works very much like selling a home with a traditional forward mortgage. When the home is sold the proceeds from the home sale are applied to the mortgage balance. The remaining money goes to the borrower or their heirs.
The Borrower Refinances the House
It is possible to refinance a reverse mortgage. Generally, people choose to refinance a reverse mortgage if they want to add a new person to the mortgage, (as in the case of marriage), or if the house has increased substantially in value and they would like to tap additional equity.
Heirs Inherit the House
When the last borrower passes away, heirs need to decide what to do. Heirs are not responsible for reverse mortgage debt. However, when the mortgage comes due, (usually 6-12 months after the last borrower passes). Heirs need to decide how they would like to resolve the debt. Options include the following:
- Sell the home – The heirs can use part of the proceeds from the sale of the house to pay off the outstanding balance and keep the remaining proceeds
- Keep the home – The heirs can keep the house if they pay the mortgage balance or 95% of the property’s appraised value, whichever is less – Heirs can refinance the loan if they choose- (If the heirs are old enough, a new reverse mortgage may be an option)
- Sign over the title and complete a deed – The heirs can give the property to the lender by signing the home’s heading to the lender accompanied by an act. This act satisfies the debt.
- Do nothing – If the heirs choose to do nothing with the loan, the lender will foreclose on the home. While possible, this is not preferable or advantageous for the heirs. Working with the servicer to complete the transfer in an official capacity should not be difficult.
Depending upon your retirement strategy and goals, a reverse mortgage may dramatically improve the quality of your retirement. A reverse mortgage isn’t complicated to understand, but it’s important to consult a mortgage advisor before making this or any other important mortgage decision.