You’re Considering a Reverse Mortgage—Here’s What your Heirs Need to Know

mid age mother helping daughter with her financialYou may be considering a reverse mortgage, or you may already have one. Like any financial decision, it’s a good idea to talk with family about the impact this kind of loan will have on your financial future—and theirs.

Here are 5 things your heirs should know about your reverse mortgage:

1. They’ll still inherit the home. There’s a common misconception around reverse mortgages that believes the bank gets the home once the borrower passes away. Actually, the heirs will inherit the home along with the responsibility to repay the loan. They can do this however they choose. Many heirs opt to sell the home and repay the loan using the proceeds of the sale. However, if the heirs wish to keep the home and repay the loan using other means, they are allowed to do so under the Federal Housing Administration’s reverse mortgage rules.

2. Heirs will never have to repay more than the home is worth. Reverse mortgages insured by the FHA come with an important protection that was recently clarified: they are non-recourse loans. Heirs will never have to repay more than the home is worth at the time of sale.

Even if the home value falls over time or the loan balance is well above the home value, heirs are protected from having to make up this difference.

3. Adding an heir to the home title may have inheritance implications. You may want to consult a real estate advisor as to whether it makes sense for an heir to be added to the home title. Transfer of the property is one requirement in order for the heirs to be able to purchase the home for 95% of its appraised value.

4. Spouses are being allowed additional protections. If your spouse is your heir, for loans originated on or after August 4, 2014, he or she may be allowed to defer loan repayment according to a new rule recently detailed by the FHA. The spouse must be named at the time of the loan closing and must adhere to certain terms, but is allowed to defer repayment until he or she leaves the home under those terms.

5. A reverse mortgage will have an impact on your estate. A reverse mortgage, like any loan, is an important financial decision that will impact the value of your assets over time. Because it allows you to borrow against your home equity today, unless you decide to repay the loan in advance, you will own less of your home equity at the end of the loan.

While it’s important for your heirs to understand the implications, ultimately a reverse mortgage is an individual decision that has improved retirement for many Americans.

If you’re considering a reverse mortgage, click here to learn more about how it may work for your situation.

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