Some retirees are conflicted about trying to leave an inheritance vs maintaining their standard of living.
Living longer than expected, insufficient savings, higher cost of living and medical expenses are just some of the things making it difficult for many older Americans to pay for retirement.
Securing a reverse mortgage is one solution many people are exploring. A reverse mortgage allows homeowners who are 62 or older to borrow their home equity. The loan accrues interest and is paid back when the borrower dies or moves out of the home. This means that the borrower’s heirs will probably inherit less. They still inherit the home, but must repay the reverse mortgage — usually by selling the home.
Is this the right thing to do? Do retirees owe their heirs an inheritance? Are there other options?
What Do Potential Reverse Mortgage Borrowers Think About Leaving an Inheritance?
Over the past few months, we asked more than 50,000 people doing research on reverse mortgages the following question:
Is it more important for you to leave as much as possible for your
heirs or have more money to use now?
Here is how people responded:
- 30 Percent Say “Money Now” and Only 6 Percent Say “Leave for Heirs”: Of those with an opinion on the matter, “money now” topped providing for heirs by a 5 to 1 margin.
- Most are Unsure: Not surprising, the majority of folks (two-thirds) aren’t sure. It can be a painful decision for some families (not just seniors).
Other research supports the idea that retirees prioritize funding their own retirements over leaving a financial legacy to their heirs. An Ameriprise Study found that 80 percent of Baby Boomers want a financially secure life while only 30 percent of them want to leave an inheritance.
What Do Reverse Mortgage Borrowers Have to Say About Heirs?
The majority of reverse mortgage borrowers who leave comments, feel strongly that their home equity is theirs to use. They do not feel an obligation to leave it to heirs.
Here is a sampling of comments:
- I worked hard all those years so that I, not my children, could enjoy these later years. I have every right to use the money from my home as I please. My children are not entitled to my home. Only a spoiled and selfish child would want otherwise. — Betty
- What I plan to do when I get to that point is to offer my children the opportunity to buy my properties for half or less of what they are worth. Kind of making my own “reverse mortgage” with my grown children. It will give me cash and give them some excellent properties to do with whatever they want upon my death. If they are too greedy to appreciate what this means for them, then I do not care if banks or strangers get the properties instead…. — A creative alternative from Gil
- I made ALL of the required payments to own it. My kids are entitled to what ever I don’t need during this life. — Dan
Another theme that you hear from Reverse Mortgage borrowers is a strong desire to remain independent. A reverse mortgage may mean the difference between asking for financial help from children and being able to live on your own.
What Do The Heirs Have to Say?
Seniors may be surprised to learn that their heirs not only do not care about receiving an inheritance, they are ready and willing to sacrifice their own finances to care for aging parents. The pollingcompany.com conducted a national online survey of 751 adults (18 and over) with at least one living parent or guardian from June 11 to 13, 2013. They found that 75 percent of adults with living parents were willing to sacrifice their own finances to help their parents.
It appears that the biggest complaint about reverse mortgages from heirs is the hassle of dealing with the Reverse Mortgage lender. Some heirs feel cheated out of an inheritance, but the majority of complaints are about paperwork and difficulties involved with settling the estate.
Most Heirs Feel Happy With Their Parents’ Decision to Get a Reverse Mortgage
- When my father passed away 10 years ago my mother was left with half of his pension, and her SS. For some reason Dad never had a 401K. A reverse mortgage was a godsend to her allowing her to live comfortably and contently. My three sisters and I are well aware of the situation and don’t anticipate that there will be any equity left when the time comes to settle up. I’ve heard varying stories, but as executor of her will I figure I’ll just deal with it. — Anne
- My dad did a reverse mortgage. He is going through some serious financial difficulties now, but has no worries about the house, it is safe. The reverse mortgage has been an absolute life saver for him. — Richard
- My grandmother got a reverse mortgage and she was able to get care in her own home till the end of her life. My aunts and uncles sold the home when she died and there was nothing left for them, but they are happy that their mother lived in as much comfort as possible. — Jane
A Few Heirs Are Incredibly Unhappy
- I haven’t talked to my mother since she took a reverse mortgage out several years back. Wall Street figured out a way to get their hands on what has traditionally been handed down to the kids. That’s fine, its her choice, but I am not going to play pretend happy family while she gives everything that my dad worked so hard for to the bank. — Left Behind
Some Heirs Complain About the Process and Interest Accrued on Loan
- We inherited a home with a reverse mortgage. We did not want the home, so I contacted the loan servicer. It was kind of a pain, but fine. — Joe
- What all these people don’t tell you is that the reverse mortgage accrues interest, compounded, even after the owner dies. For my late ex-husband’s estate, the interest and principal almost exceeded the value of the home. Most people don’t realize that the interest accrues, even after death, and can eat up whatever is left of the equity in the house. — DreamersRose
- My mother is 94. When she had to go to a nursing home, the loan servicer was notified. I would not recommend a reverse mortgage. The people I had to deal with were all out of town. I had provided them my POA once and had to send it again because the foreclosure side of the company was in a different state than the lenders. They should communicate better. — Charlene
4 Tips for Balancing Heirs’ and Your Own Needs Vis a Vis a Reverse Mortgage
If you are considering a reverse mortgage, and are at all concerned about how this decision will impact your heirs, here are a few tips:
1. Communicate Now
Research (and common sense) suggests that discussing financial and estate issues can be incredibly stressful. However, discussing the decision to get a reverse mortgage can:
- Eliminate surprises
- Help everyone prepare
- Enable you to explore alternatives with your family
2. Be Clear About Your Needs
The reality is that downsizing and securing a reverse mortgages is a financial necessity for many people. Research from the Center for Retirement Research at Boston College has indicated that many households are seriously unprepared for retirement and home equity is one of the few viable options available to make ends meet.
If you need the money now, but are concerned about taking away an inheritance, talk to your children about your lack of additional options.
3. Educate Your Children About the Loan
Reverse mortgages are confusing and there is a lot of misinformation. The more everyone knows about the loans, the better outcomes there will be. Here are some of the key points you may want to discuss:
- Heirs have options for what to do with the home when the loan comes due. Heirs can keep the home if they can pay off the loan with their own money (with a HECM loan, heirs can satisfy the loan by paying 95% of the appraised value of the home). Or, heirs can sell the home to pay off the debt and keep any difference between the value of the home and the amount owed on the reverse mortgage — if applicable.
- The interest accumulates on the loan. When you die, the loan amount may be even greater than the value of the home due to interest. However, your heirs will never have to pay more than the value of the home.
- It is best for heirs to contact the reverse mortgage lender as soon as possible after the death of the borrower.
More tips for resolving a reverse mortgage loan can be found in: “What Happens to a Reverse Mortgage After Death or When a Reverse Mortgage Comes Due.”
4. Make Clear Documentation Part of Your Estate Plan
As stated above, many of the complaints that heirs have had about reverse mortgages have been around the difficulties of settling the loan with the lender. You can help your heirs by providing as much documentation to them about who to contact and the terms of your loan.
It is important to make sure that your heirs know that they must notify the servicer (lender) within 30 days of the homeowner’s death of their intentions — what they plan to do with the home. This early notification preserves the heir’s options gives them up to 12 months to settle. If they don’t notify the servicer, then the lender can act on their own.
Additional Resources For If You Are Considering a Reverse Mortgage
Reverse mortgages can be confusing. There is a lot of reverse mortgage information available to you. You might also want to estimate your loan amount and see if a reverse mortgage might be right for you or not with the reverse mortgage suitability test.
