About 15 years ago, my mother did a reverse mortgage on her home. She didn’t need the money; rather, the money went to me for seed money to start my business. Fortunately, the business has done well, and I wanted to pay off the reverse mortgage so my mom would own her home free and clear. When my mom did the reverse mortgage, her home was worth approximately $250,000 and she was able to do the reverse mortgage for $100,000. When I went to pay off the reverse mortgage, I was surprised at how large the outstanding balance was. In fact, because her home has gone down in value the current value of the reverse mortgage is worth more than the fair market value of the home. I question whether it makes sense to pay off the mortgage. Should I just give the money to my mom outright? I am also curious as to my mom’s responsibility for the mortgage, and since I’m her only child, if she passes away with the reverse mortgage, am I responsible for it?
In answering your second question first, the answer is no. Neither you, being the heir to the property, nor your mom will be responsible for the difference between what the house eventually sells for and what the balance is for the outstanding mortgage. If there is a shortfall, that is the responsibility of the lender and thus, neither you nor your mom needs to worry about being personally responsible for any shortfall.
Because the property is worth less than the outstanding mortgage, it would seem to me that it would not be a very good strategy for you to pay off the reverse mortgage. I would think a much better strategy is to give that money to your mother and let her use it during her lifetime to improve the quality of her life. This way, she has full access to the money, which she would not have if she paid off the mortgage or paid down the reverse mortgage.
When it comes to reverse mortgages, people are sometimes confused as to how they work. Unlike a traditional mortgage where you make monthly payments on principal and interest, in a reverse mortgage there are no payments. As long as you live in your home, you never have to pay the mortgage off, nor do you have to make payments. Typically, the reverse mortgage is due either when the homeowners move out of their home, or upon death. In the case at hand, if the house is worth less than the balance of the outstanding mortgage at the time of your mother’s passing, the lender will take the home. There will be no obligation from the deceased or their family to cover the shortfall. On the other hand, if upon death the home is worth more than the outstanding mortgage balance, the home can be sold, the mortgage paid off, and any excess amounts go to the family, not the mortgage company.
I have no problem using reverse mortgages in the right situation. My general view is that reverse mortgages should only be used to increase the quality of life of the homeowner. I’m generally not a fan of doing reverse mortgages to use the proceeds to loan money to others, pay for grandchildren’s college education, or things of that nature. In the case at hand, I probably would not have recommended the reverse mortgage, and the reason is not that I don’t think it’s important to help family when you can; it’s just that you have to take care of yourself first. When you do a reverse mortgage, you are using the equity in your home, and you won’t be able to use it in the future. Because we never know how long we’re going to live, and we don’t know what our cost of living will be in the future, I am very leery about using equity in the home for purposes other than for the homeowner.
For many seniors a reverse mortgage is a lifeline in the fact that it allows them to maintain the quality of their life throughout their lifetime. It can be a great way to increase cash flow to a senior. I have recommended reverse mortgages for such things as paying off first mortgages, paying off credit card debt and providing additional cash flow. These reasons make sense to me. On the other hand, if you’re going to use the proceeds from a reverse mortgage for non-essential items such as vacations or to give or lend to family and friends, my advice is you should think twice. Having equity in your home that you can tap is a great resource in times of need.
For those of you who are thinking about a reverse mortgage, my advice is to learn all you can before you proceed. When you deal with a reverse mortgage company, like any other mortgage company, make sure you understand the fees involved. In addition, just like when you’re shopping for a traditional mortgage, in a reverse mortgage it also makes sense to get competitive bids.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org