Reverse Mortgages – Whose Equity Is It Anyway?

It’s one of the main concerns I hear from my clients.

“I would love to do the reverse mortgage, but I want my kids to get the equity after I pass away”.

There’s a misconception that when you do a reverse mortgage, the bank owns your property and gets the equity after you’ve died.

The equity at the end of the reverse mortgage goes to the heirs.This simply is not correct.

The equity at the end of the loan still goes to your heirs.  Just like a regular “conventional” type loan, the loan gets paid off through the sale of the home and your heirs walk with whatever is left.  The difference with the reverse mortgage is the interest gets paid in lump sum at the end of the loan.  Unlike a regular mortgage that you pay monthly.  You’re paying interest on both loans.  One gets paid monthly (conventional mortgage), the other gets paid at the end (reverse mortgage).

After learning this, the majority of my clients breath a sigh of relief and we move forward with the processing of their loan.  Sometimes though, it’s a little more complicated.

I’ll hear things like “I want my kids to have all the equity when I die” or “I don’t want to spend any of my kids’ inheritance”.

I normally reply with a simple one word question:

WHY??

The reverse mortgage is a loan that gives borrowers the ability to access some of their homes equity while they’re still alive.  Based on the FHA calculations, borrowers are only able to access a portion of their homes value.  It’s based on age and it’s going to range anywhere from approximately 45-55% of the appraised value.

I say this to make a simple point – it’s very likely there will still be equity for the heirs when you pass away.

Is there a “guarantee” that the heirs will have equity at the end of the loan?  Absolutely not.  There’s no guarantee there will be equity left over with a regular “conventional” loan either.

There is, however, a guarantee they’ll never be stuck with a debt at the end of the loan.  It’s called non-recourse (you’ve heard me talk about this before), and it protects the borrower and the heirs from all personal liability.

Back to the original purpose of this post – deciding whose equity it is.

The equity on a reverse mortgage belongs to the person on title.

The equity belongs to the borrower that holds title to the property and they shouldn’t fear using some of it to pay for monthly living expenses.  You’ve worked hard to pay down the balance of your loan.  You shouldn’t feel guilty about using some of it to make your life easier.  Your kids will be just fine.

As a matter of fact, 99% of the time, the heirs are all for the reverse mortgage.  They’re normally the ones that reach out to me initially.  Once they understand how the loan works and the FHA protections that are in place, they’re all for it.  They say things like:

“Mom, I just want what’s best for you.  Don’t worry about me.  I’m fine.”

or

“I’m doing just fine on my own, Mom.  I want you to live comfortably.”

So in closing, my suggestion is simple…..

Don’t be afraid to use YOUR equity in YOUR home to help pay for YOUR monthly expenses.  Talk to your kids about it.  Talk to your friends about it.  But at the end of the day, understand you have an option available that can keep you in your home and give you access to funds.  The reverse mortgage might be just the loan you need to make life simple again.

Click here to see how much you qualify for.

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