What happens at end of reverse mortgage?
In November 2021 my wife’s grandmother passed away. She and her husband (who passed away several years before) got a reverse mortgage several years ago. I won’t go into the craziness of some of that story except to tell you that you should have a will if you own any assets that family members may want as it makes it a lot easier to express your wishes after you died. But at the end of the reverse mortgage, there are a series of things that need to happen pretty quickly because of timelines that are now enacted because of the death of those on the reverse mortgage. Today we will cover these questions.
These ideas are based on my personal experience and opinion and should not be considered professional financial investment advice. Furthermore, the ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Table of Contents
What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners over the age of 62 to borrow against their home’s equity without having to make any payments. This loan comes with some unique features, such as allowing borrowers to remain in their homes for life and receiving funds in the form of a lump sum, monthly payment, or line of credit. Understanding what happens at the end of a reverse mortgage is important for those considering this type of financial product.
At the end of a reverse mortgage term, borrowers must repay the amount they owe, which includes principal and interest accrued over time. The repayment can be made out-of-pocket or by selling the house and using proceeds from the sale to cover the outstanding debt.
A reverse mortgage is when you sell your home to a bank but still get to live in it. Most of the time the term of the reverse mortgage comes due when the people on the reverse mortgage die. The term could also come due if you need to move those on the reverse mortgage out of the home for medical reasons for an extended period of time. You need to know that this could legally trigger if they are in a longer-term rehab care facility. If the term triggers for any reason, now the family has a choice to make.
Who owns the house at the end of a reverse mortgage?
The bank technically owns the house at the end of the reverse mortgage. You will have 30 days to let the bank know what your intentions are with the home. You can choose to just walk away from the property and the bank will take it over. You can choose to obtain a mortgage to pay off the reverse mortgage amount. You can choose to sell the home to then pay off the reverse mortgage and can keep the difference per any will / state laws in place.
Obviously, if you are an only child and there is a will it is a lot easier to navigate this process than if there are a lot of siblings and no will.
How long do you have to pay off a reverse mortgage after death?
When considering a reverse mortgage, it is important to understand the process from beginning to end. A reverse mortgage allows homeowners age 62 or older to access the equity in their home without having to make monthly payments. However, when the last surviving borrower passes away, the loan must be paid off in full, or else the lender can foreclose on the property. So how long do you have to pay off a reverse mortgage after death?
The amount of time that you have will depend on several factors including whether there are heirs and what type of program was used for obtaining the loan. Generally speaking, if there are no heirs and all borrowers on the loan are deceased then you must pay off within 30 days of notification from your lender. If heirs were identified and they wish to keep the house then they may qualify for repayment terms of up to 12 months.
How does a reverse mortgage get paid off?
Think of this like you are rebuying a home that has a lien on it because that is basically what has happened. Your parents or grandparents have allowed a bank to pay them a lump sum or a monthly payment in exchange for a legal hold on that property. In order to pay off a reverse mortgage you need to come up with enough money to pay off the bank.
If you have that sort of cash on hand you can pay in cash, but most people will need to get a mortgage from a different bank or sell the home to pay off the amount of the bank lien.
Or you can choose to not pay off the mortgage at all and the reverse mortgage bank will probably get the house for cheap.
I always like to find out how companies make their money so I know what the product they are selling is.
So when I watch commercials that say we will pay you every month to stay in your home I ask “What does the bank get out of this?”
I imagine that there are enough people that have a reverse mortgage and no children so the bank can get a property for cheap but they will need to wait years before they can take it over. And taking a property over from someone over 62 means that the bank will likely have home repairs to do before they can sell the home. For my wife’s grandparents, there was a 10% interest charge on the lump sum they took out. So every year the bank charged 10% of the principal balance every year on average, and this was when the base interest rate was under 1%.
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Can a family member take over a reverse mortgage?
Absolutely, as long as they can pay the bank. For the reverse mortgage terms, I have seen the house has to be sold at or close to fair market value even to a family member. One way to prevent this is to put a younger person on the title as they would then just have to come up with the reverse mortgage amount.
If they sell to someone not on the title then at least in my state the law stipulated the home couldn’t be sold just for the amount of the reverse mortgage. So look into the specific laws in your state if you have an aging parent or grandparent that is in a reverse mortgage and you don’t want to lose that property.
What is the downside to a reverse mortgage?
I mentioned that the bank was charging about 10% interest per year on the reverse mortgage for my wife’s grandparents. It could go as high as 15% per year and given the interest rate hikes in 2022 they would pay closer to 15% than 10% on that reverse mortgage. This means that there would be a lot less money left over to split upon the sale of the property to any heirs.
If the property is sentimental to the family then you are risking the possibility that your family can lose that home, if they cannot qualify for a mortgage (including 3.5% down) to purchase that home.
If you have others living with you, like adult children who may not be able to take care of themselves financially then a reverse mortgage could render them homeless in 6 – 12 months after you die or end up in a long-term facility. This isn’t the sort of legacy I would want to leave to my children and grandchildren.
When should you consider a reverse mortgage?
Reverse mortgages are popular because people haven’t saved enough for retirement. Also in your old age, your medical bills start to climb as your health fails. Social Security plus maybe $80,000 in their 401k or IRA isn’t enough to live on and they only have one other asset: their home.
So in many ways, they are in a rock and a hard place. Not planning and putting away money in their 20s / 30s / 40s / 50s leaves most Americans in a bad place. They then sell the only thing they have left which is their home.
If you aren’t in that place then here are some things to consider:
- Do you need the money? If not, then why bother?
- Do you want to leave this home to your children or grandchildren? Can they afford to pay back the loan at any given moment? Can they be added to the title to avoid probate and other issues that can occur if you die suddenly?
- Do you not have any heirs (or any you care about)? If you don’t have an organization to will the home to then maybe getting the extra money now to live more comfortably isn’t a bad idea.
- Do you plan on moving out of this home in the next 5 years? If so, just sell the home and forget about a reverse mortgage.
Can you sell a house that has a reverse mortgage?
Absolutely, in fact, that is what most people will have to do in order to make some money from the property.
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Can heirs walk away from reverse mortgage?
Yes, you can just walk away from the home. The bank needs to know if you are going to just walk away or try to pay back the reverse mortgage in the first 30 days after the term comes due. You may want to go to the home and get any valuables out of it if you plan to just walk away.
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What happens at end of reverse mortgage?
You will have 30 days to contact the bank after the death of the last person on the reverse mortgage to let them know if you want to walk away from the home or try to buy it from the bank. If you are going to buy it from the bank you will have up to a year (depending on the bank’s terms and state laws) to obtain the money to buy out the reverse mortgage amount. The bank will tell you how much that will be and when you have to pay it back.
At that point, if you are on the title you should be able to pay just the reverse mortgage amount (see your state’s laws on this and consult an attorney), or you can sell it to a 3rd party or other family members. In my state, we legally had to sell it for fair market value and a family member (that wasn’t on the title) obtained a mortgage and purchased the property.
On a side note, if you are 62 or over please create a will, especially if you have a number of children, grandchildren, and potentially great-grandchildren. It will make a hard time easier for your family to know what you actually wanted. Not just recalling random things you may or may not have said to them over the years regarding family valuables.
About Dwight Scull
I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.
I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.
I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.
I used these daily habits to lose 100 pounds and keep it off.
I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.
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