Planning With Reverse Mortgages And Your Estate Plan

By: Randall A. Denha, J.D., LL.M.

You have likely seen several advertisements for reverse mortgages if you have spent any time watching television or surfing on the internet. The concept is a simple one: as long as you own and live in your home, you can supplement your retirement income with a loan that you do not need to pay off. The trade-off when it comes to a reverse mortgage is that you are using your home’s equity to receive that extra retirement income.

Reverse Mortgage loans are not what they used to be. In the past, Reverse Mortgage loans were used by people that had no other options. But today, even the wealthy are using reverse mortgages to take advantage of today’s unique market conditions. People can use reverse mortgage loans to pay off their home faster, improve their chances to qualify for a second home or investment property, and all with more safety and less risk than a traditional loan. Even Financial experts have chimed in to urge retirees to “have a retirement plan that includes a reverse mortgage strategy from day one”.

Reverse mortgages are available only to homeowners ages 62 or over. As the name implies, they are the opposite of a traditional “forward” mortgage, where the borrower makes regular payments to the bank to pay down debt and increase equity. A reverse mortgage pays out the equity in the home as cash, with no payments due to the lender until she moves, sells the property or dies.

As you tap into your home equity, the loan balance grows. Borrowers are not required to repay the loan balance until they sell the home or move out. Each year, the Federal Housing Administration (FHA) sets the lending limits on FHA loans, including the Home Equity Conversion Mortgages (HECM).

HECMs are the most common and popular type of reverse mortgage. The reverse mortgage limits are based on the median home prices for a particular area, usually being set at or between an area’s low- and high-cost limits.

At the end of 2021, the FHA announced it would increase HECM reverse mortgage lending limits to an all-time high of $970,800.

Reverse Mortgages Explained

How they work: Most reverse mortgages are federally insured and have several requirements including:

• at least one borrower is aged 62 or older;
• the home must be the primary residence;
• the borrower must have financial resources for the upkeep of the home (taxes, insurance, maintenance); and
• the borrower must own the home outright or have a low enough “regular” mortgage.

Impact on your estate plan

If you plan on leaving your home to your heirs, understand that a reverse mortgage will reduce the value they receive. Depending on when you pass away and how long the reverse mortgage was in place, your home’s equity may have been exhausted meaning that there is nothing of value to leave your heirs. In that case, your heirs may need to pay off or refinance the mortgage to keep the house. While repaying a reverse mortgage at death relieves a homeowner from current lifetime mortgage payments, these loans often require repayment in full at death.  Therefore, the mortgage lender may be more aggressive in seeking payment than a traditional mortgage lender.  A legal representative may be placed under pressure to obtain his/her appointment from the Probate Court quickly, if applicable, and to sell the property to avoid a foreclosure.  This may also present a problem if other family members live in the home and are not prepared to move to allow the house to be sold.

Estate fiduciaries must be vigilant and understand the various assets and liabilities which must be attended to for a successful estate settlement.  If a person is engaging in estate planning it is a good idea to consider the effect that a reverse mortgage may have on an estate.  Surviving family members may have known that the mortgage used to purchase a home was paid in full, only to be surprised to learn that there is a substantial reverse mortgage balance which has been accumulating over time and must be immediately paid by the estate.  Since these mortgages do not need to be repaid until death and accumulate interest over time, careful consideration should be given to the long-term effect on an inheritance.

Retirement income

The positive trade-off of a reverse mortgage is that you will have an additional source of retirement income, which can be received in several different ways including: (1) an upfront lump-sum, (2) a monthly payout, or (3) a line of credit. Each scenario has its own tax, borrowing costs, and home value implications. If you’re considering a reverse mortgage, talk to your financial advisor and estate planning attorney first, to make sure you select the best payout option for your circumstances.

The Implications of Reverse Mortgages

There are several factors to take into consideration when you are contemplating a reverse mortgage. Specifically, the effect it will have on your estate plan, the type of retirement income you are trying to obtain, scams to watch out for, and anything unique to your circumstances. There are several questions you should address before deciding whether or not a reverse mortgage is right for you. These include:

• Can the life insurance you have in place pay off your reverse mortgage?
• Will your reverse mortgage exceed your home’s value when you pass away?
• What will happen to others living in the home if you die without paying off the loan?

Buyer beware: It is important to make sure you avoid scams that are pretending to be legitimate reverse mortgages. One way to help avoid being tricked is to make sure you work with a reputable provider. You should also make sure that a reverse mortgage is a good fit for your financial needs before signing any documents. Finally, consider the estate planning impact entering into a reverse mortgage may have on your intended wishes once you are gone.