You may hear the advertisements on TV: “Get a reverse mortgage!” Reverse mortgages can help you, especially if you are older. But what are reverse mortgages, and can they be used in or do they have any role in estate planning?
Normally, when you have a mortgage, you pay the mortgage. But what if the mortgage paid you? That sounds impossible, but that’s exactly what a reverse mortgage is, in some sense. Now, of course, your mortgage company isn’t paying you out of its own pocket. It’s just using the equity in your home to pay you.
Equity in property is fantastic. However, it doesn’t put food on the table and it’s not liquid cash that can help you with monthly bills. If you’re older and thinking that maybe you won’t need that equity later on, and you’d rather have it now in the form of cash, a reverse mortgage does that. The bank pays you from the equity in the home–but on the other hand, that means that every payment made to you, lowers the equity in your property.
There are some age and equity requirements to even get a reverse mortgage, and the borrower still has to pay taxes and insurance on the property, if there is a mortgage balance remaining on the property.
There are some drawbacks to a reverse mortgage, the primary one being that you are reducing the equity in your home. From an estate planning standpoint, that means that whoever is inheriting your home, is getting less than what they would normally inherit—you have already drawn from the equity in the property.
There is another problem with reverse mortgages when it comes to estate planning: many reverse mortgages say that when you pass away, the loan is considered to be accelerated. That means that the entire amount of the note will be due, immediately. For your heirs to keep the property, they will need to pay off whatever the balance on the loan may be, all at once.
If they cannot pay, the bank will foreclose and sell the house (any equity left after the sale would go to your beneficiaries).
In some cases, you may be able to leave money in your estate plan to help beneficiaries pay off the loan, although if you had that kind of money, you probably wouldn’t need the regular payments from a reverse mortgage anyway.
Beneficiaries of life insurance policies may be able to use that money to pay off the loan—but that’s if the money comes before the bank forecloses.
One option is to simply give your reverse mortgage payments to your heirs while you are still alive. But, that defeats the purpose of a reverse mortgage and still doesn’t avoid the problem of the bank selling the property when you pass.
Contact your Illinois estate planning lawyers at Orlowsky & Wilson, Ltd at (847) 325-5559. Our Lincolnshire estate planning lawyers can help you figure out what kinds of strategies are best for your unique situation.
