Federally insured reverse mortgages are a way for homeowners 62 and over to borrow money using their home as collateral. This allows a homeowner to continue to live in the house, as long as the house is their primary residence, without having to make payments.
Reverse mortgages come due when the last borrower on the reverse mortgage dies. So, if you have a reverse mortgage, you need to talk to your heirs about it. Here’s why:
Your executor must notify the bank of your death when the last owner dies. Within 30 days of the notification, the bank will send someone to appraise the property. The amount due the lender will be the lesser of two amounts, either the reverse mortgage loan balance or 95 percent of the appraised market value of the home.
Your heirs must choose whether they wish to keep the property, sell the property or turn the keys over to the lender. They have a short window of time to decide: an initial six months. And while they are deciding and before the loan is settled, interest and fees continue to eat away at any remaining equity.
The good news is that your heirs can never owe more money than the value of the property.
If the heirs decide to sell the home, they must list the home at a minimum of the appraised value. If the home is underwater, the heirs could choose to just hand the keys to the lender.
For some people, a reverse mortgage can be highly beneficial but there are some caveats.
- Reverse mortgages are expensive. A whole host of fees can push the cost of the mortgage to $15,000 or more for a $200,000 loan. In addition, there is a service charge fee of $35 a month, an annual FHA insurance premium of 1.25% of the mortgage balance. Borrowers must also continue to pay property taxes, homeowners insurance, and homeowner’s association bills.
- Couples that take out reverse mortgages in the name of the older of the two spouses, in order to maximize payments run into trouble if the older spouse dies leaving the younger spouse forced to repay the loan or lose the home through foreclosure and eviction.
- Reverse mortgages are even more complicated than regular mortgages.
If you have a question about reverse mortgages, listen to Seattle-area elder law attorney Rajiv Nagaich Saturday mornings from 10 until 12 at KTTH AM 770 and get answers by calling 877-76-AGING (762-4464).