Understanding Reverse Mortgages

A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a unique type of loan designed for homeowners aged 62 and older. Unlike a traditional mortgage where you make monthly payments to the lender, a reverse mortgage allows you to receive payments from the lender. These payments can be in the form of a lump sum, monthly installments, a line of credit, or a combination of these options.

Key Features of a Reverse Mortgage:

• Eligibility: Typically, homeowners must be 62 or older and own the property outright or have a small remaining mortgage balance.
• No Monthly Payments: Borrowers are not required to make monthly mortgage payments.
• Accruing Interest: Interest accrues on the loan balance over time, increasing the amount owed.
• Loan Repayment: The loan becomes due when the borrower passes away, sells the home, or moves out permanently.

How a Reverse Mortgage Affects the Payoff Balance (vs. a Normal Mortgage)

This is where a reverse mortgage significantly differs from a traditional mortgage:

• Traditional Mortgage: 
  • With a traditional mortgage, you make regular principal and interest payments, gradually reducing the loan balance.
  • The payoff balance decreases over time.
• Reverse Mortgage: 
  • With a reverse mortgage, the loan balance increases over time because interest accrues and is added to the balance.
  • Also, any payments made to the homeowner increase the balance.
  • Therefore, the payoff balance grows, not shrinks.
  • This is why when inheriting a home with a reverse mortgage, the amount owed is usually higher than the initial amount borrowed.

Example:

Imagine a homeowner took out a $200,000 reverse mortgage. Over several years, due to accrued interest, the payoff balance could easily exceed $300,000 or more. In contrast, a traditional mortgage’s balance would decrease with each payment.

What Happens When You Inherit a House with a Reverse Mortgage?

If you inherit a house with a reverse mortgage, you have a few options:

• Sell the house. This is the most common option. You can sell the house and use the proceeds to pay off the reverse mortgage. If the house sells for more than the mortgage balance, you can keep the remaining equity.
• Keep the house. If you want to keep the house, you will need to pay off the reverse mortgage. You can do this by taking out a new mortgage, selling other assets, or using your own funds.
• Let the lender foreclose on the house. This is the least desirable option, as it can damage your credit score.

How to Sell an Inherited House with a Reverse Mortgage

If you decide to sell the house, you will need to work with a real estate agent who is experienced in selling homes with reverse mortgages. You will also need to notify the reverse mortgage lender of your plans to sell.

Once you have an offer on the house, you will need to close on the sale. At closing, the proceeds from the sale will be used to pay off the reverse mortgage. If the house sells for more than the mortgage balance, you will be able to keep the remaining equity.

Tips for Selling an Inherited House with a Reverse Mortgage

• Get a home inspection. This will help you identify any potential problems with the house that could affect its sale price.
• Make any necessary repairs. This will also help you get a higher sale price.
• Price the house competitively. You want to make sure that your house is priced so that it will sell quickly.
• Be patient. It may take some time to find a buyer for your house.
• Obtain a payoff amount from the lender as soon as possible. This will allow you to see the true amount owed.