A reverse mortgage is often utilized by older Americans to supplement their income during retirement by accessing the equity in their home. The proceeds of a reverse mortgage can be used for any financial obligations the senior may have, including routine maintenance of their home. The reverse mortgage is a complex type of mortgage loan secured by the borrower’s real property that allows the borrower to trade the equity in their home for either regular payments or a lump sum payment from the lender. Borrowers are still responsible for paying their homeowner’s insurance and real property taxes.
The amount owed by the borrower will increase over time as interest on the loan accrues. This differs from a traditional mortgage in which the borrower makes regular payments to the lender decreasing the amount owed over the life of the loan. Generally, a reverse mortgage does not require monthly home mortgage payments and the loan will not need to be paid back until the last surviving homeowner either dies, sells the property, or moves out permanently.
The costs of the mortgage including the loan origination fee, mortgage insurance fee, appraisal fee and title insurance fees are typically rolled into the loan and not paid by the borrower up front – although the fees for a reverse mortgage tend to be higher than those of a traditional mortgage.
When the homeowner/borrower passes away and the house passes to his or her heirs, the estate’s fiduciary will be faced with several options for satisfying the lender. The fiduciary may either pay off the loan, sell the house and use the proceeds to pay off the loan, deed the house to the lender, or let the lender foreclose on the property. The last two options are typically used when the amount of the mortgage exceeds the value of the house.
One potential upside of a reverse mortgage is that if the value of the house at the time of the borrower’s death is less than the balance of the reverse mortgage, the lender cannot bring a claim against the estate of the borrower for the balance. In contrast, if the value of the house exceeds the balance of the loan, the excess funds from the proceeds of the sale will become a part of the borrower’s estate.
Regrettably, the fiduciary of the borrower’s estate has a mere thirty (30) days from the date of death to determine how they would like to proceed in satisfying the mortgage and only six (6) months to obtain the financing to carry out their intentions. Further, fiduciaries are not always informed of their rights and their options to satisfy the mortgage and lenders may immediately initiate the foreclosure process. For this reason, experienced legal counsel is necessary to advise fiduciaries of their options when an estate includes a property encumbered by a reverse mortgage.
Call the Law Offices of Roman Aminov, P.C. at 347-766-2685 to speak to a knowledgeable estate and elder law attorney about your reverse mortgage concerns.
This article is for educational purposes only - to provide you general information, not to provide specific legal advice. Use of this post does not create an attorney client relationship and information contained herein should not be used as a substitute for competent legal advice from a licensed attorney in your state.