This is perhaps one of the most common questions we receive from elderly people about reverse mortgage – what happens to it when I die? Reverse mortgage is mostly the last mortgage that people will ever need and so many Americans and their children seek answers to this question often.
Reverse mortgage allows elders to live in their houses without paying their mortgage amount until they die. But then what happens after their death? What is important to know about how reverse mortgage works is that the benefit amount is calculated on the youngest borrower’s age. Now the actual question that arises is what happens when that youngest borrower dies.
With such types of mortgages, no monthly payments are needed on the principal amount or the interest due. All of this keeps accruing until the last borrower dies or leaves the house. So this should not worry them. But they are responsible for paying any insurance and taxes that are related to the maintenance of their house. So it is technically not correct to think and assume that with reverse mortgage, there is never any expense that you will have to bear during your life time.
After death, this type of mortgage works similar to traditional or forward mortgage. If you think that after the death of the borrower, the home reverts to the bank, then that is not quite right. In the same way as forward mortgage works, in reverse mortgage as well any remaining amount left after the borrower dies, get automatically transferred to their heirs or successors. This remaining amount depends on a number of things – the amount of money the deceased borrowers had already taken out from their mortgage amount, the accrued interest over time and the value of the property at the time of transferring the dues to the heir.
The market value of the property can either be high or low at the time of valuation. So imagine the market to be really depressed at the time of the borrower’s death. In this case if the borrower had already taken more cash out of their reverse mortgage than what the property is worth currently, there will be no equity left in the house. But then this is not something peculiar to reverse mortgage and this is how all types of mortgages really work.
When the property is passed on to the heirs after the borrower’s death, the heir then has to decide if they would like to keep the property or sell it off. If they decide to retain the property, they must get a new loan as refinance and pay the balance off to the bank. If they decide to sell the property off, they will have to inform the lender of the reverse mortgage of their decision to do so as soon as possible.
To conclude, here are some myth busters on how reverse mortgage behaves after the death of a borrower:
- The property does not belong to the bank after the borrower dies. It gets transferred to their heirs.
- The heirs have full right to either retain the property or sell it off.
- The heirs have a period of 12 months to make this decision and must communicate to the servicer of the mortgage about their decision.
- This mortgage is due only after the death of the last remaining borrower.
- Borrowers still need to pay their taxes and any insurance on the house while they live in the property.