Under the Influence – My Personal Experience with a Reverse Mortgage

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By Shawndi Purselley, CFP®, CDFA®, Owner and Co-Founder, Wealth Advisor

My grandparents raised me in a tiny 2 bedroom, 1 bathroom home.  My great-grandfather, Ernest, built this house when he came home from World War II.  Lucile, my great grandmother, decided about 35 years ago to finally gift this house to my grandparents, Glen and Janet, as part of their inheritance.    My grandparents remained in this home until they both passed away 5 year ago.   During both Glen and Janet’s illnesses I became more involved in their finances and personal affairs.  Toward the end of their lives I learned that they had placed a reverse mortgage on the home Lucile had given them.  I was disappointed to know that the house Ernest had built and that had provided so many family members a home throughout the years was going to be potentially lost by our family to the reverse mortgage lender.   That being said, the money from the reverse mortgage gave my grandparents the ability to stay in their home and provided them with financial freedom for the rest of their lives.

What is a reverse mortgage and how does it work?

A reverse mortgage is available to homeowners age 62 or older.  The benefit is that it can allow the homeowner to convert a portion of the equity in their home into a tax-free loan.  If there is a current mortgage on the property, it must be paid off before the reverse mortgage disbursement or by disbursement of the proceeds itself.  The reverse mortgage loan proceeds can be paid out in a lump sum, monthly payments, or through a line of credit to allow homeowners to access the funds as needed.  Homeowners are not required to make loan payments; however, they are required to pay the annual property taxes as well as maintain home owners insurance on the property.  When the final homeowner passes away, or permanently leaves the home, the loan balance becomes due and payable.

What options do you have as an heir to an estate once the homeowner passes away?

The first thing you can do is to walk away from the home.  There are really two ways to do this.  The lender can simply foreclose on the property.  Or, the heir can also complete a Deed in Lieu of Foreclosure which will require the estate to sign forms which will title the property back to the investor.  Completing the deed will avoid the actual process of “foreclosure.”  One thing that is important to remember is that these are non-recourse loans.  This means the heirs are not liable for any additional amount owed.  These loans are insured by the government and as such, any shortfall is covered.

Another option is to keep the home. As an heir, you have the option to either pay off the loan balance in full, or pay 95% of the current market value, whichever is LOWER.

I personally chose the option to keep the house when it came time for me to make the decision about my childhood home.  After my grandparents passed, I notified the lender.  I also informed the lender that I was interested in buying out the mortgage and keeping the home.  The lender agreed to start the process for this and ordered appraisals on the property.  My grandparents owed approximately $150,000 on their reverse mortgage.  The appraisers returned an appraised current value of the property at just under $50,000.  I was able to purchase my family home for around $47,000, which 100% satisfied the terms of the loan and the lender.  The paperwork was processed and I became the new proud owner of an old dilapidated tiny home.  I admit, it really wasn’t one of my better financial choices.  I had no intention of living in this house, nor did I really even know what to do with it after I had purchased it.  It cost my husband and me thousands of extra dollars in upgrades and repairs just to get the home livable.  After utilizing it as a rental house for about a year or so, we made the decision to sell the property.  I was able to re-coop my expenses, but that was about the extent of it.   I made a very emotional decision in buying this house back.  And in hindsight, I don’t think I would make the same decision again.  But it was such a sentimental home and my grandparents blindsided me with the news of the reverse mortgage.  In addition, they were both nearing the end of their illnesses and I really did not have much time to process all of this information before needing to make a decision.

My suggestion is that if you are considering a reverse mortgage on a home that has a lot of emotional connection to your family, you should consider discussing it with your heirs and find out their emotional connection to the home.  Even if you do not plan on discussing alternatives with them, I think it is appropriate to at least tell them of your decisions and your intentions.  You may also find a family solution that works best for everyone that you had not considered before.   Reverse mortgages can really offer a great opportunity for you and/or other family members to access equity while continuing to live comfortably in the family home.  However, they are not for everyone.

If you are considering a reverse mortgage, please reach out to us.  We have great resources to help you talk through the options and alternatives and to find a solution that is best for you and your family.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

* The opinions contained in this material are those of the author and not those of CWM or Cetera.

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