REVERSE MORTGAGE FAQ: WILL MY KIDS GET MY HOME WHEN I DIE?
If you’re considering a reverse mortgage and you have children, the question of “With a reverse mortgage, will my kids get my home or will the bank take it?” has got to have entered your mind. Easier than writing; I recorded a short video with the answer to that question. Please take a look at it below and of course let me know if you have any questions or need more information.
So, now that you’ve watched the video(or if you weren’t able to), you know that when you get a reverse mortgage, you still have full ownership of your home. When you do pass away your kids will get your home.
THIS SOUNDS TOO GOOD TO BE TRUE…HOW DOES IT WORK?
Did I just read your mind? So how does a reverse mortgage work where we give you money, you don’t make any mortgage payments AND you stay on the deed? And how do the kids get the home?
To answer these common questions let’s look at Nancy’s situation.
Nancy is a 73 year old widow. She has 3 kids who she paid through college, and her family is her life. But Nancy is also on fixed income and has a mortgage. She didn’t save much when she was younger, and besides about 3 years of savings and investments, Nancy really doesn’t have much besides her home.
NANCY ISN’T IN AWFUL FINANCIAL SHAPE RIGHT NOW, BUT IN THE BACK OF HER MIND SHE KNOWS SHE’S ONE EMERGENCY AWAY FROM DISASTER.
Nancy has 8 grandchildren, and because of that she knows that her son and two daughters aren’t in a financial position to start paying for her mortgage. They’ve got their own families and expenses. Nancy just refuses to be a burden on her loved ones.
Nancy ended up getting a reverse mortgage, which completely eliminated her financial burden. First, it paid off her mortgage. Now, instead of paying the mortgage company on the 15th of each month, Nancy pays herself(by adding the mortgage payment to her savings account). Next, Nancy got $87,000 of tax free money to put into savings.
The combination of saving her mortgage payment and her “upgraded” savings account means that Nancy will be financially comfortable for the rest of her life.
Before we could close the reverse mortgage Nancy needed to be put at ease. And one of her biggest questions in the beginning was…
DOES THE BANK TAKE MY HOME OR CAN THE KIDS GET IT?
Here’s what I told Nancy(and then her FHA counselor reaffirmed it).
First, a reverse mortgage is just a loan like any other mortgage. It is NOT free money and must be paid back at some time in the future(and it will be paid back when you die or when you sell your home). The vocabulary term for this is it is a “secured loan”.
THE HOME STAYS IN YOUR NAME
When you look at your deed after you’ve got a reverse mortgage, you will see that it is still “vested” in your name. You will see a “lien”(ie mortgage) to the reverse mortgage company. Again, this just secures the debt, so the mortgage will automatically be paid back if you sell the home or transfer the deed(ie give it to the kids).
HOW DOES REVERSE MORTGAGE INTEREST WORK?
Because this is a mortgage after all(and therefore not free), there is interest that is charged on the money that you take. Interest rates differ based on financial markets(and what year it is), but in May of 2019 reverse mortgage rates sit at about 5%.
EVEN THOUGH THERE’S INTEREST YOU DON’T HAVE TO MAKE MONTHLY PAYMENTS
Here’s how this works. Let’s say you get $100,000, which pays off your mortgage a gives you a little bit of cash(by the way I’m using $100,000 because its a nice easy number to understand). You aren’t making monthly payments on the $100,000, so at the end of the first year you owe $105,000(because the 5% interest rate “accrues”). And at the end of the second year you owe about $110,000 for the exact same reason.
Of course you don’t have to worry about paying this back while you’re alive, EVEN IF 2008 happens and your house goes under water(which is pretty darn unlikely in my opinion).
BUT WHAT ABOUT MY HEIRS?
Nancy was worried about her kids. She was OK with them getting less out of her home, and her kids wanted her to use her home’s equity to make her life easier. MOST adult children feel the same way. Nancy’s childrens’ biggest concerns were to ensure that she can’t lose the home, and that the reverse mortgage was safe and secure for her. Once her kids fully understood how the program worked…they were all in.
But I still had to explain to Nancy how her kids would get the money. So we went over this example.
Let’s say that when someone passes away, their home is worth $400,000 and $250,000 is owed on the reverse mortgage. If this is you, your heirs would choose whether they want to keep the home or sell it.
YES THE HOME BELONGS TO THE HEIRS
Once they’ve made their decision, if the heirs want to keep the house, they just pay the reverse mortgage($250,000) off. They can pay it off however they want, but some common ways are through a refinance, inheritance cash or through their parents’ life insurance policy.
If the heirs DON’T want the home then they can just sell it. After all, they probably have their own home and family. Moving into YOUR home would be quite a disruption…right? Assuming they sell the home for $400,000 and $250,000 gets paid back to the reverse mortgage company, the heirs would pocket $150,000.
As far as timelines go, the heirs have 6 months to sell the home, and then they can petition HUD for up to two 3-month extensions.
My biggest goal for this article was to make clear not just the FACT that your heirs get your home, but I wanted to show exactly what your heirs’ options are. I hope I’ve made this clear.
If you have any other questions about how this works…feel free to reach out directly at (267) 289 1095 or email@example.com.