Reverse Mortgages and the Probate Estate Dilemma
We have all seen them, the commercials late at night, a stately gentleman, graying hair perfectly parted speaking of the virtues of a reverse mortgage and how they can benefit older Americans entering retirement. Once they complete the pitch, the closing image is that of the typical American family surrounding grandma or grandpa on the porch enjoying what appears to be a beautiful day thanks to this process. The reality however is often quite different. In actuality, a reverse mortgage creates certain probate estate dilemmas that usually outweigh the benefits.
What Is A Reverse Mortgage?
A reverse mortgage is a home equity loan that unlike a conventional loan disburses the monies to the borrower in monthly installments over a period of time. The reverse mortgage is secured by a deed of trust on the property for an amount which usually includes not only the money borrowed but also an additional amount sufficient to cover the interest payments on the loan until the borrower passes away. The reverse mortgage becomes due and payable to the lender when the borrower passes. Thus, the borrower or their estate at the time of the borrower’s death may end up owing the reverse mortgage company a significantly larger amount of money than the borrower initially borrowed or received. Finally, if the property is the principal residence of a least one surviving borrower the loan will not become due and payable until that surviving borrower passes as well.
What Options Are There for Probating A Reverse Mortgage?
Once the borrower passes, there are typically four options for an estate. First, the estate can elect to pay off the reverse mortgage with proceeds from the estate. Secondly, the estate can refinance out the loan with a conventional loan, which in effect is paying off the reverse mortgage. Third, the estate can elect to sell the property, whereby the loan will be satisfied from the proceeds of the sale and the balance of the equity will be paid to the estate. Fourth, the estate can issue a deed in lieu of foreclosure to the lender to avoid the lender from initiating foreclosure proceeding against the property.
Typically, the lender will make a request of the estate shortly after the borrower has passed and will give the estate 30 days to elect which of these options it wishes to pursue or face foreclosure. A far cry from the beautiful day that the commercial depicts.
Benefits to Reverse Mortgages
There are a few benefits to reverse mortgages. First, the borrower has tax-free use of their home equity as long as they continue to live in their home. However, if you must go to a nursing home or assisted care facility and cannot return to your home because you require constant care, that may trigger repayment of the reverse mortgage. While the money is tax-free, as the old saying goes nothing in this life is really free. The reason the money is tax-free is that it is your equity in your home, which you already paid taxes on when you earned it and paid your mortgage to accumulate equity in the Property.
Withdrawing the equity from your residence while you are alive through this process can be an effective means of passing a portion of your estate to your loved ones. In addition, you will be able to do so while you are alive without tax penalties. However, there are many costs to your estate in interest on the reverse mortgage loan and related fees. Overall, these fees often exceed the benefit for most Americans.
It’s important to remember that in order to qualify for a reverse mortgage, the lender will often require that your property be free and clear of any other lien. They do this in order for your property to qualify as security for a reverse mortgage. In some instances, the lender may wrap the balance of your existing mortgage into the balance of your reverse mortgage. However, as they say, “the devil is in the details”. A reverse mortgage is typically not for the full value of your home. The amount of loan that you will qualify for is based on the lowest selling margins for your areas.
How a Reverse Mortgage Works
For example, your home is worth $431,000 in today’s market. The value limit that the lender places on the property may reduce your home’s value. For the purpose of computing the reverse mortgage to $362,790 which would result in loan principal limit of approximately $259,395. This would be the absolute maximum the reverse mortgage lender would lend on a house worth $431,000. Remember the reverse mortgage lender is going to subtract all of the lender’s fees upfront. Let’s say the fees are approximately $17,125 to give you $236,621 as your net principal limit. However, when the reverse mortgage company records their deed of trust on your property, they are going to record it for the $362,790 amount.
Thus, your property is significantly more encumbered than the amount of money the borrower received. These assumptions are based on the borrower taking monthly payments; the situation is even direr if the borrower elects to take a lump sum payment.
The reverse mortgage commercial may seem enticing. It may seem like an easy way to provide for your golden years. However, the sunny day the commercial promises may cause a lot of agony and trouble for your heirs.
Contact our DC Law Office for More Information
For more information on reverse mortgages and the probate estate dilemma please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.