Reverse Mortgages and Probate

We've all seen them: the TV ads featuring actors from our favorite shows of past decades, now a bit grayer and more mature—just like us. We liked them then, and we like them now, as they impart more wisdom, this time about reverse mortgages and how they can relieve financial worries for older Americans. At some point, the camera pans to smiling senior citizens who are now able to enjoy their golden years unburdened by financial stress.

If this sounds too good to be true, it probably is. Let's talk about reverse mortgages, what they are, and how they can affect your family at your death (or sooner).

What is a Reverse Mortgage?

In essence, a reverse mortgage is a home equity loan. Unlike a typical home equity loan, in which you borrow a sum of money using your home as security and then pay it back over time, With a reverse mortgage, your home still secures the loan, but you receive a lump sum amount or possibly a line of credit. At your death, or the death of the last surviving borrower who uses the home as a principal residence, the reverse mortgage becomes due and payable. The amount due will be greater than the amount of disbursements, in order to cover interest.

How is a Reverse Mortgage Repaid?

There are a number of ways to repay a reverse mortgage. Let's assume for the sake of simplicity that you are the sole borrower and live in the home until your death. One option is that the reverse mortgage could be repaid out of your probate estate. However, there may not be enough assets in your probate estate or your heirs may not want to liquidate the estate to repay the reverse mortgage.

Another repayment option is for your estate to choose to sell the home. The reverse mortgage could be repaid out of the proceeds of the sale, with any additional equity in the house being paid to your estate. If your estate does not want to sell the house, it may pursue the option of refinancing. In this case, the estate would refinance the reverse mortgage with a conventional loan.

Last, and generally least desirable, is the option of a deed in lieu of foreclosure. In a "deed in lieu," the estate deeds the property to the reverse mortgage lender in exchange for the lender not initiating foreclosure proceedings against the property.

You may not care which option your heirs choose, and you may even be fine with the reality that the payments you receive will be significantly less than the true value of the home (this has to do with how lenders determine how much you are eligible to receive in a reverse mortgage). But you may not have considered this: reverse mortgages become due and payable when the last borrower is no longer in the home.

You may intend to live out your days in your home. Unfortunately, if circumstances make it necessary for you to be cared for in a nursing home, you will be required to repay your reverse mortgage if you are absent from your house for a year or more. At that point, nursing home expenses and the cost of repaying the mortgage could be a crushing financial burden. And it's possible a reverse mortgage could affect your eligibility for Medicaid to pay nursing home bills.

Consult a Professional Before Getting a Reverse Mortgage

Reverse mortgages can offer benefits. If you need the money that's tied up in your home and are not concerned about keeping your home debt-free for your heirs, reverse mortgages may be a viable option for you. Even so, it's advisable to consult with an estate planning attorney or financial advisor to discuss your goals and see if there is a better way to meet them. You may find that the disadvantages of a reverse mortgage significantly outweigh its benefits.