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Reverse Mortgages and Estate Planning

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Your home may be your most valuable asset and represent the largest portion of your estate. A reverse mortgage can help you hang onto that asset, by letting you tap into your accumulated home equity without having to sell the home. Still, the money you receive from the reverse mortgage will also have to be repaid after you die, reducing the value of your estate, possibly substantially. Here is what you need to know about reverse mortgages and estate planning.

KEY TAKEAWAYS

  • If you have a reverse mortgage on your home, it will have to be paid off after you die, reducing the home’s value to your heirs.
  • The rules are different for spouses who inherit homes with reverse mortgages than for other heirs.
  • A reverse mortgage could allow you to supplement your retirement income without drawing down other assets in your estate.

What Happens to Your Reverse Mortgage After You Die?

When you leave a home with a reverse mortgage to someone, you’re also leaving them with responsibility for the mortgage. What they’ll need to do next depends on their relationship to you.

If Your Heir Is Your Spouse

Spouses who inherit a home with a reverse mortgage fall into three groups. Which group your spouse is in will determine whether they have a right to stay in the home and possibly continue to receive benefits from the reverse mortgage.

  • Co-borrowing spouse – A co-borrowing spouse is listed as such on the original loan documents. Any co-borrower (they don’t have to be your spouse) can stay in the home and continue to receive money from the reverse mortgage.
  • Eligible non-borrowing spouse – Spouses who didn’t qualify to be co-borrowers (typically because they were under age 62 when the loan was issued) can be listed on the mortgage as eligible non-borrowing spouses. If they meet certain other requirements, they can also remain in the home, but they won’t receive additional money from the reverse mortgage.
  • Ineligible non-borrowing spouse – Such spouses don’t meet the requirements for one of the first two categories. They must buy the home themselves if they wish to remain in it. They can also sell it.1

In the case of co-borrowing or eligible non-borrowing spouses, the home and reverse mortgage become part of their estate when they die.

(Please note that this article describes the rules for Federal Housing Administration (FHA)–insured home equity conversion mortgages (HECMs) originated on or after Aug. 4, 2014; older HECMs have somewhat different rules. The Consumer Financial Protection Bureau provides both sets of rules on its website.)2

If Your Heir Is Someone Other Than Your Spouse

If you leave your home to your children or other heirs who are not your spouse, they will not be eligible to keep the reverse mortgage; instead, they must pay it off within a specified time frame. Essentially, they will have three choices:

  • Sell the home –After they pay off the mortgage, anyequity that remains is theirs to keep.
  • Buy the home –They can also pay off the reverse mortgage with their own funds if they want to keep the home.
  • Deed the home over to the lender – This way of settling the debt is known as a “deed in lieu of foreclosure.”3

Fortunately, no matter how much you owe on a HECM, your heirs won’t be stuck with a net debt. The most they’re obligated to pay is either the full loan balance or 95% of the home’s appraised value, whichever is less. The FHA insurance will cover any difference.4

Your heirs may have to take action fairly quickly. Technically, they have only 30 days from receiving a due and payable notice from the lender, although they can ask for an extension of up to a year to give them time to sell the home or arrange for financing to buy it themselves.5 Which course they are likely to follow will depend on a variety of factors, including how attached they are to the home and how much debt it carries.

One suggestion you may see online is to use some of the proceeds of the reverse mortgage to buy a life insurance policy made payable to your heirs. This could provide them with sufficient cash to purchase the home after your death. However, you may need all the money you receive from the reverse mortgage to cover your living expenses and not have any left over to buy life insurance, which can also be costly in your later years. Still, this could be an option for some people.

If You Have Other Assets

Reverse mortgages may be of greatest appeal to people who lack retirement accounts, nonretirement investment accounts, or adequate cash savings, making their home their only significant financial asset.

For example, if you know your heirs would like to inherit your home, drawing on those other assets for income could make more sense than running up a large balance on a reverse mortgage. On the other hand, if your heirs don’t have any particular attachment to the home, borrowing against it can be a way to preserve your other assets for them.

Wade Pfau, author of Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,notes that having a reverse mortgage to draw on is one way to protect your other assets in a bear market. Rather than being forced to sell investments when prices are down to supplement your income, you can tap the reverse mortgage for income until prices rise again.6 Of course, you’ll pay a price for that flexibility in terms of the reverse mortgage’s steep up-front costs.7

A reverse mortgage might also help protect your other assets if you ever face major long-term care costs. Bear in mind, though, that the mortgage will have to be repaid if you move out of the home and into a care facility for 12 consecutive months or more, unless you have a co-borrowing or an eligible non-borrowing spouse living in it.8

How Much Can You Borrow With a Reverse Mortgage?

How much you can borrow with a reverse mortgage depends on your age (or the age of your co-borrowing or eligible non-borrowing spouse, if they’re younger than you), the equity you have in your home, and current interest rates. The current maximum for a government-insured HECM is $970,800.7

Where Can You Get a Reverse Mortgage?

To get a HECM (the most common type of reverse mortgage), you must go through a lender approved by the FHA. There is a search tool for locating lenders on the website of the FHA’s parent organization, the U.S. Department of Housing and Urban Development (HUD).9

At What Age Do Most People Get Reverse Mortgages?

While you’re eligible for a reverse mortgage at age 62, most people who get one wait until later. A Consumer Financial Protection Bureau study found that in 2019, the latest year for which data is available, the median age of reverse mortgage borrowers was 73.10

The Bottom Line

Your home may represent a significant part of your estate and having a reverse mortgage on it will affect how much of its value your heirs will receive when you die. If you have financial assets in addition to your home, supplementing your income with a reverse mortgage can help you preserve them for your estate. Because your heirs will generally be responsible for paying off the loan when you die, it’s worth discussing the situation with them well in advance.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersReverse Mortgages and Estate Planning

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