A reverse mortgage may initially seem to be a good way to convert home equity into immediate cash, and without the need for making monthly mortgage payments. Before considering a reverse mortgage, however, you should consider speaking with your accountant, financial advisor, and estate planning attorney to fully evaluate the tax and estate ramifications.
The amount of money that a homeowner can borrow is based on the equity in the home, the homeowner’s age, and the applicable interest rate. Assuming they qualify, some older clients may consider reverse mortgages if they are low on cash and have a lot of equity in their homes, which can then help to pay monthly debts and obligations and give a tax-free source of income for the rest of the homeowner’s life while continuing to live in the home.
However, reverse mortgages can also wipe out the equity in the home and therefore significantly impact the inheritance the homeowner intended for his or her loved ones. In addition, there may be considerable obstacles later on, in either keeping the family homes or selling them once the homeowner has died.
Fluctuations in home values over time are an impact to the amount of equity available for a homeowner’s estate. Depending on the equity, the heirs may be left to sell the property to repay the loan. Sometimes a home may be valued less than the loan repayable amount, and perhaps the financial institution would be amenable to repayment of the loan and allowing the heirs to retain the property. The heirs may be in a position where they are forced to turn the keys over to the bank, sign the property over to the bank, and decide not to be involved in any other issues related to the property.
Financing a payoff of the loan balance may also be troublesome for heirs, even if using other sources to do so, such as another mortgage on the property, proceeds of life insurance, or other sources. Another factor is if the homeowner lives with others in the residence, and payment of the reverse mortgage comes due when the last surviving borrower dies; a spouse may still be able to reside there without repaying the loan immediately. A spouse or other long-term residents may qualify to be co-borrowers, which may also help. Thus a fully-thought-through estate plan should take into account what the other residents do if the estate must sell the home, including whether there is a spouse who can be protected. These may all be additional considerations for a homeowner when evaluating a reverse mortgage.
A homeowner should take all of this into consideration and be sure to consult with an estate planning attorney if evaluating whether a reverse mortgage is appropriate in the long-term. This may also involve the homeowner making their heirs aware of borrowing a reverse mortgage loan.