Fred Thompson (the Senator) and Henry Winkler (the “Fonz”) aren’t wrong about the benefits of using the equity in your home to make it possible to stay in that home, but pay attention to some potential traps in your reverse mortgage.
It should be obvious, but when you spend your assets, those assets are no longer available for your heirs to inherit. The family home may have particular emotional significance for your children, perhaps they grew up or spent summer vacations there. If you decide take out a reverse mortgage, it must be paid off at death, and this usually requires all of the equity in the home. Understand that losing the family homestead at your death may cause additional emotional distress among your children. There may be other ways to handle the problem.
Reverse mortgages have specific rules. By law, there must be a clause in the contract that allows the debt to be repaid for 95% of the value of the home at the death of the last borrower. This is a benefit because there will be no deficiency on the mortgage. Because this limits the amount your estate will owe at death if your home is under water, it is important to understand and ensure that your reverse mortgage contract includes this wording. Also, ask the broker to give you some calculation examples. Ideally, get him to write them down on the mortgage company letterhead and sign them.
The contract will also indicate how quickly after the last death the mortgage company may begin collection proceedings. Be sure that you and your family understand that time frame. If only one of the spouses signs the mortgage, that mortgage will have to be paid at their death. This could cause the surviving spouse to lose the home.
There might be a situation involving a second marriage. The couple moves into one of their homes and decides to sell the other. On the house that is kept, a reverse mortgage has been placed, but the debt is in one name only. When the named party passes away, the bank has a right to evict the surviving spouse since he/ she was not “on the contract.” This can, once again, cause unnecessary anguish, because pre-planning was not done.
If you are contemplating a reverse mortgage, speak to an attorney first to ensure all of the potential scenarios are fully understood as well as their implications.
Contributed by MH Phoenix Estate Planning Attorney and senior partner, Dan R. Morris.
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This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.