Question from our reader:
I would like to know, if my parents are taking a reverse mortgage, will I get something left when they die? Also can the bank charge me for that reverse mortgage or it will end will them dying? I feel a bit stupid but I’m not sure at all about that and I really would like to know it.
These are things you should know and we encourage borrowers and their heirs to ask all the questions they want. Firstly, the reverse mortgage is a loan just like any other loan (it’s not a grant). Your parents are not required to make any monthly payments with a reverse mortgage so the loan operates in reverse of a standard or forward mortgage. Instead of a falling debt and rising equity scenario, borrowers have a rising debt and falling equity scenario. In other words, if the borrowers are accruing interest, the balance is rising so the amount they owe is as well and their equity position will go down if the balance rises faster than the value of the home (which one has to assume it would under almost all normal scenarios).
The lender will give your parents an amortizations schedule that will tell them how much they will owe over the years at the start of the loan, but this is only as good as the information they use. In other words, if your parents take the full amount they are eligible for on the day the loan funds, the amortization schedule will be 100% accurate because they cannot take any more money after that. However, if they only take a portion of their funds, the only way you can really see how the loan will perform is if you ask the lender to run different scenarios based on how much money they think they will withdraw each year. Otherwise, the amortization schedule will only show the initial draw and not subsequent draws which would affect how quickly the money will be used and how much interest will accrue.
And we have more tool available to borrowers right on our website. All Reverse Mortgage has developed a reverse mortgage calculator that borrowers can use to input payments that will show borrowers how any given payment would affect the balance of their loan. Reverse mortgages require no monthly or periodic payments, however, there is never a pre-payment penalty with a reverse mortgage and borrowers who can afford to make some payments often choose to do so to keep their balance down or to pay off the loan early. With our calculator, borrowers can run their own scenarios to see how different payment amounts would affect their mortgage.
If property values remain the same or even drop and your parents are fortunate enough to be able to live there for many years without ever having to make a monthly mortgage payment and the balance on the reverse mortgage does exceed the value when they pass, you actually have options that are to your benefit. The bank can never look to any other assets other than the house to repay the obligation. No matter how much is owed, they can never go to any heirs and request payment of any kind other than the sale of the property. Also, if you decide you want to keep the property, you can pay off the reverse mortgage at the balance owed or 95% of the current value of the home, whichever is less. If the values have gone up and there is equity in the property, that equity belongs to you and you could choose to sell the home to cash out the equity or keep the home and pay off the reverse mortgage at that time. (…read more on Non-Recourse feature here)
The question of whether or not you will get anything when they die all depends on how much money they borrower, how much interest accrues and what property values do between now and then. No one can honestly answer that for you at this time. More importantly though is what are your parents needs at this time and are you able to assist them if those needs are great and they do not get the reverse mortgage?
If your parents do not need the loan, or you are able to help them meet their needs, I would advise against the loan anyway. However, if they are unable to make their current mortgage payments or their other living expenses without help and you are unable to provide it, what other alternatives are you offering?
Reverse mortgages can use a little or all of the equity in the home, but it depends mostly on the amount still owed on the property at the time and the borrowers’ needs. If your parents need help with the property and their living expenses to stay in their home for whatever reasons (the current mortgage payments have become a burden, other payments are out of hand, income has been drastically reduced due to retirement, loss of job or pension decreases, savings are reduced or eliminated as so many have experienced in their 401K’s, etc) and do not want to move at this time, the reverse mortgage gives them the ability to stay in the home they love.