There are commercials abound harping on the benefits of reverse mortgages. AAG’s (American Advisor’s Group’s) commercial featuring actor, Fred Thompson, claims that reverse mortgages are a safe, effective financial tool that allows a person to receive cash out of his home, with no monthly payments while still owning the home. For an individual with no heirs or who has no plans on keeping the home in the family, this may indeed be the case.
The problem comes when an elderly person, who has taken out a reverse mortgage, has willed the property to his/her children or is survived by a spouse not listed on the reverse mortgage. The terms of the reverse mortgage in effect push the heirs and/or spouse out of the home.
With a reverse mortgage, homeowners 62 and older with substantial equity in their home can borrow money against the value of the home to help defray living, medical and other expenses associated with retirement and old age. However, it is expected that the value borrowed will be paid back once the homeowner moves out or dies. A homeowner is considered “moved out” if the homeowner has not resided in the home as the “primary residence” for a year. This means that if the homeowner is moved to a long-term care facility and has been there for over a year, the homeowner will be required to start making payments on the reverse mortgage along with long-term care facility expenses.
Once the loan becomes due, the idea is that the loan will be paid off with the sale of the home. If heirs would like to keep the home, they have to pay off the loan reducing the amount of inheritance they would have received. Federal rules require survivors be given an option to sell the home or settle the loan for a percentage of the full amount, in some instances, a percentage of the home’s current value. Many lenders fail to inform heirs of this option. Additionally, far too often, as indicated in a recent New York Times article, reverse mortgage companies are trying to foreclose on homes weeks after a homeowner dies or threatening to foreclose if heirs do not pay the full balance of the mortgage. Luckily small advances have been made for non-signatory surviving spouses who were or have the potential to be inconvenienced or displaced after the death of their spouse. On September 30, 2013, the United States District Court for the District of Columbia in Bennett et al v. Donovan ruled that the Housing and Urban Department (HUD) regulation that allowed lenders to demand surviving spouses immediately repay the reverse mortgage loan violated federal law. It is now the responsibility for HUD to come up with regulatory changes fixing the problem.
Prior to taking out a reverse mortgage it is best to determine what inheritance you would like to leave your family. While a reverse mortgage does provide the opportunity to leverage the equity in your home to defray expenses, it may also leave your heirs with an uphill battle in order to keep the home in the family. An Elder Law attorney can advise you on the best way to cover expenses while still leaving something for loved ones. We at Dillman & Associates focus on helping seniors and their families plan for the future and react to challenges that may occur. We would love the opportunity to assist you or a loved one with planning needs.