Reverse Mortgage Heirs: How much will you owe

Today we received a question that came across one of my blog posts "The Pros and Cons of the Reverse Mortgage" This is an excellent question that I'm sure most heirs have when families may be considering the reverse mortgage.

"My grandma is 76, retired once but had to start working again to keep up with the property taxes. My father is 52 and moved in with her a while ago so that he could pay the mortgage but now he is falling behind. I help out with what I can but it's not nearly enough.

Both my grandma and father DO NOT want to leave the house, nor sell it. They both insist that they want to keep the house to pass down to their heirs. They have been looking into a reverse mortgage so I started to read up on them (great article by the way, it's my biggest resource with all the links and stuff) and I'm concerned because my grandma wants me to promise her that I’ll buy the house when the time comes.

The house was recently assessed at 509,000, they owe 208,000 on it. If they do go ahead with a reverse mortgage and assuming she only use's the money she receives to pay off the original mortgage (she's very stable on her living expenses and between my father and I the insurance and taxes will be taken care of) would I be looking at a 208,000 loan when this is all said and done or something much higher?"

Mike,

Good Question and one that needed to be asked depending on what your family's ultimate plans are to be. A reverse mortgage works exactly the opposite, or in reverse, or a standard forward loan (the regular types of loans everyone is used to seeing). The forward mortgage that she has now is a falling debt, rising equity loan because as she makes payments she slowly pays the principal down and pays the interest that is due every month. A reverse mortgage is a rising debt, falling equity loan because your grandmother would no longer have to make payments of principal or interest, that amount would be added to the balance that would be owed when the loan was paid off (the balance would due once your grandmother no longer occupied the property as her primary residence). Under this scenario, if she lived there for many years, the balance would be considerably higher at the time the loan was paid off.

Having said that, reverse mortgages require no payments of principal and interest on a monthly basis, but there is never a pre-payment penalty and we have had more than one borrower who obtained their reverse mortgage with the intention of making periodic payments to keep the balance from rising significantly.

The last borrowers with whom I spoke about this issue could not make the $2,500 monthly payments of their existing mortgage but felt very confident that at $1,500 they would be very comfortable. They met with their accountant and determined that an annual payment of interest helped them for taxes as well (but I do not give any advice in this area, you would need to speak with your financial and tax advisors for your own circumstances). They determined that rather than pay a monthly "payment", they would make one payment in December, around the 15th, of each year which would keep their balance from rising significantly, would allow them to keep getting an annual interest write-off for taxes that they needed, and gave them a chance to review their financial position with their financial advisor prior to making the annual payment to see if maybe they should make a larger or smaller payment for any reason or anticipated needs.

This worked for the borrowers at the time because it was a husband and wife, the reverse mortgage was not due and payable until the last borrower left the home and they still had other income which made them able to pay some of their existing payment, they were just no longer comfortable at the entire payment. In your case you have your father to consider as well since he is not old enough to be on the reverse mortgage at this time which means that when your grandmother passes, your father would have to make other arrangements to remain in the home. If you kept the balance down, he may be able to obtain a reverse mortgage on a higher valued property by the time he is 62, but there are several factors to consider that could affect this including interest rates at the time, HUD Lending Limits and property values which are out of your control and could prohibit this plan.

The reason I did bring up the other scenario is that since you are all making the payments of the existing mortgage (or were), taxes and insurance now, you could also do the same thing as the other borrowers, but only pay what you are comfortable with. This would keep the balance down and I would advise heirs to talk to your family accountant or tax advisor for your own circumstances. But this just might be the way for you to save the home at this time while keeping the balance from rising to a point in the future that would prohibit you from being able to refinance it at that time in your own name.

The "wild card" if you will is not knowing the future and the fact that your father is not eligible to be on this reverse mortgage because if something happened to your grandmother, you would either need to be able to obtain permanent financing between the two of you or your father would not be able to remain in the home at that time. The question you all must ask yourselves & heirs is whether or not it is better to get a reverse mortgage and keep the home now; be faced with certain loss of the property if you can't make the payments (if that is the position you now find yourselves); or sale of the property at this time and can it be done in time if the payments are already in arrears.

A lot to think about I know, but I didn't want to give you a simple "yes" or "no" answer because there is a lot going on here that needs your consideration. Please feel free to contact us with additional questions or if you would like to discuss at length!

Michael G. Branson (CEO All Reverse Mortgage Company) is a Mortgage Broker who has over 34 years of mortgage banking experience. If you or a family member would like to know how much you will owe request an amortization schedule and personal analysis from the experts by clicking here or call us Toll Free (888) 801-2762

Here are some useful posts that may also help potential borrowers and their heirs:

• Making payments on a Reverse Mortgage, Tax Implications
• Reverse Mortgages - what happens after death