Reverse mortgages have been a popular retirement option amongst those over the age of 62. They allow homeowners to convert the equity in their homes to cash, so they can live with no mortgage payments or other debt, fund home improvements and repairs, and have cash reserves on hand. The home is like a bank and the borrowers have zero payments but get “paid” from the equity in the home on a monthly basis.
It is important to understand that what may seem like a great idea is really just a deferment of payment. The reverse mortgage allows the homeowners to postpone payments on the loan (yes, it is a loan) until death, a move, or sale of the home.
The tricky part of reverse mortgages is understanding how they effect the heirs of the homeowners. If you are considering a reverse mortgage, or if you have parents who may be, you need to fully understand the legalities before making any decisions. Customarily once the borrowers die the heirs are supposed to have the opportunity to pay off the loan for a percentage of the full amount. But there have been many reports that the reverse mortgage companies have been demanding the heirs pay off the mortgages in full, or else face foreclosure of the property.
The big problem for heirs is that many of the properties have risen in value since the time the reverse mortgage was obtained. Thus even if they are offered to pay only a percentage of the loan amount (usually 95%), the payment is based on the current fair market value of the home. Many heirs do not know their rights and the lenders are not telling them either, according to articles and lawsuits.
The key with reverse mortgages is to understand what will happen to the home if the borrowers die. Borrowers need to be aware of the rules that govern how their heirs will have to handle the property in order to avoid foreclosure, and they need to make sure to discuss this with their heirs. Those who are in the heir position should know their rights before the time comes to exercise them, because time limits could play against them if they sit and wait.
If you are considering a reverse mortgage it is important to discuss your options with your accountant or financial planner, and I definitely recommend a visit to your attorney as well. If your parents are reverse mortgage borrowers it is imperative to understand their loan and your rights as an heir before it is too late.