Houston Estate Planning and Elder Law Attorney Blog
There are many rules about reverse mortgages, including what happens at the end of the mortgage. What if the children decide they want to undo the reverse mortgage and buy out their parents, so the home can be kept in the family?
Let’s start by understanding what a reverse mortgage is, and how it works. This is a way for seniors to tap the equity in their homes. It’s usually done to generate cash, sometimes to pay for care and other times to supplement retirement accounts. However, the rules are a bit complex, says nj.com’s recent article, “Can we undo a reverse mortgage to keep the home?”
One of many common misconceptions about reverse mortgages is that the bank owns the home.
A reverse mortgage is just an easier way for those 62 and older to qualify for a traditional home equity line of credit, without a requirement to pay back principal and interest over time. This is important to seniors on a fixed income who may want to borrow cash without a monthly loan payment.
However, the downside to not paying principal and interest, is that over time the loan balance increases rather than decreases.
Just like a traditional mortgage, when the borrower moves or dies, the bank will want to be reimbursed.
If the loan balance is more than the value of the home, the bank takes ownership.
However, if the value of the home is more than the loan value, the homeowner—or heir—may sell the home and pay off the loan.
If the homeowner wants to decrease the outstanding loan during homeownership, they can typically do this.
Paying down reverse mortgage debt will increase the amount of money available to borrow later.
Two things that should take place before making a decision about settling a reverse mortgage loan. One, talk to the company that holds the loan to find out what their rules are. Second, talk with your estate planning attorney to find out how the reverse mortgage may impact your estate plan and any planning for long-term care expenses. The estate plan and the reverse mortgage need to work together to protect the homeowners and the family.
Reference: nj.com (December 13, 2019) “Can we undo a reverse mortgage to keep the home?”