As a parent or grandparent, you may want to ensure that you leave an inheritance to your children and their children, and if you're thinking about taking out a reverse mortgage, you may be wondering how that may affect their inheritance. Here's a look at the basics:
1. ELIMINATING CURRENT LIENS
If you currently have a lien on your home, you can use a reverse mortgage to pay it off. To explain, imagine you currently owe $100,000 on your home. Based on the value of your home and your age, you qualify for a reverse mortgage worth $150,000.
In this case, you can use some of the reverse mortgage to pay off your existing lien, and you can spend the remaining money as you wish. That helps to ensure your kids don't inherit a home with a high interest rate loan on it.
2. REDUCING FINANCIAL BURDENS DURING YOUR LIFETIME
If you have to pay a monthly mortgage payment on your home, that cuts into your budget. In particular, if you are living off of Social Security benefits, a large mortgage payment can take up a significant portion of your income. However, if you pay off that loan with a reverse mortgage, that puts more money in your pocket and helps to ensure that you don't have to rely on your children financially during your retirement.
In contrast, if you own your home outright, you don't have to make a monthly payment, but you still have to cover costs such as property taxes, repairs, and homeowner's association dues. If you don't have enough money for those expenses, a reverse mortgage can provide you with monthly cash disbursements so that you can cover those expenses, without turning to your family for help.
Although that does not directly affect their inheritance, per se, it can help to safeguard their finances. As a result, they may be less likely to need an inheritance from a financial standpoint.
3. INHERITING A HOME WITH A REVERSE MORTGAGE
In simple terms, a reverse mortgage is the reverse of a regular mortgage. Instead of you making monthly payments to the bank, the bank makes monthly payments to you. Under most arrangements, these payments continue until you die or move out of the house permanently.
If you die, your heirs have several options, depending on the circumstances. If you have used up only some of your reverse mortgage, your heirs can repay it and continue to own the house. To explain, imagine your home is worth $500,000 but you have only used $100,000 of the reverse mortgage. In this case, your heirs could use cash or another loan to pay off the remainder of the mortgage.
Alternatively, they could also opt to sell the home. In this scenario, if the home sells for $500,000 and there is only $100,000 owed on the mortgage, your heirs can pocket the remaining $400,000.
In cases where the home is worth less than the amount owed on the reverse mortgage, you don't have to worry about your kids' being saddled with a bill. Instead, your family can opt to sell the home to cover the mortgage, and the bank simply writes off the excess amount.
To illustrate, imagine you die owing $500,000 on a reverse mortgage, but your home is only worth $400,000. When the home sells, your family doesn't have to repay the difference. Similarly, if your children or grandchildren want to own the home, they don't have to pay off the whole mortgage. In fact, in some cases, they only have to pay off 95 percent of the home's value, regardless of how much is owed on it. In this case, that would equate to a payment of $380,000.
If you own your home outright and don't need any extra cash, a reverse mortgage may not be the best option for you. However, if you want to ensure that you aren't a financial burden on your children during your lifetime and if you want a setup that also ensures your children won't inherit a large debt, a reverse mortgage may be ideal for you.
Contact us at Retirement Funding Solutions to learn more about reverse mortgages.