Reverse mortgages can hamper the ability to pass a home to heirs
A person doesn’t need to do much more than turn on the television these days to be confronted with offers to take out a reverse mortgage. At first glance, these loans can seem like a pretty good deal – homeowners age 62 or older can draw an income from the equity in their home, and the debt doesn’t need to be repaid until the homeowner either moves out or passes away.
The income from a reverse mortgage can be a life-changer, especially for retirees who saw their savings evaporate during the Great Recession, or for those who are struggling to afford expensive medical bills.
However, reverse mortgages also have a downside that many borrowers don’t anticipate-they can make it very difficult for a homeowner to pass his or her home on to loved ones after death. If this is part of your estate planning goals, you might want to meet with an attorney to discuss alternate options.
The problem with reverse mortgages
The difficulty with reverse mortgages comes from the fact that the loan must, at some point, be repaid. Often, this means that the loan is paid off by selling the home after the owner moves out or passes away. But, if the intent is for an heir to assume ownership of the home, he or she must pay off the reverse mortgage, and usually quite swiftly.
After a reverse mortgage loan comes due, heirs have 30 days to decide what to do with the home, and up to six months to come up with a financing plan. In addition to paying off the loan, heirs are supposed to be offered the opportunity to pay 95 percent of the home’s current fair market value.
Unfortunately, according to a recent report in the New York Times, not every lender behaves as it is supposed to. Even when they do, heirs often find themselves facing foreclosure or other financial crises as they work to pay off the debt and keep the family home.
Alternative estate planning strategies
If you want your loved ones to take possession of your home after you die, then it is worth it to consider ways to protect your finances so you don’t need to borrow against the equity in your home. As one option, Medicaid planning can help you manage your assets in a way that will allow you to become eligible for Medicaid benefits should you need long-term care.
In addition, it can be beneficial to structure your estate plan in a way that will allow your heirs to enjoy their inheritance without having to pay a significant amount of money out-of-pocket. For example, you may wish to establish a trust that can help pay for the costs of maintaining the residence. Additionally, it is wise to work to minimize the estate tax liability your heirs will face, especially since the fluctuations in the real estate market make it difficult to accurately predict how much your home will be worth when it comes time to pass it on.
An experienced estate planning attorney can help you with all of these issues, and more. If you’ve got questions about the best way to protect your wishes after death, an attorney can work with you to create an individualized plan that protects you and your heirs.