With a regular mortgage, you borrow money to buy a house. With reverse mortgages, you use your house to borrow money. Homeowners at least 62 years old can borrow against their equity and never have to pay it off unless they sell or move out of the house. Instead, the bill comes due, including interest, when the owner dies.
Due After Death
If you inherit a home with a reverse mortgage, you can't pay the loan back in monthly installments. The loan comes due after the owner's death, and it's due in one lump sum. That includes the loan amount, interest on the loan and possibly fees. New York State, for instance, allows reverse-mortgage lenders to charge servicing fees of up to $30. The homeowner can either pay the fee each month or add it to the loan.
Depending on the size of the loan, the interest rate, and any drop in home values in the local market, you may inherit a home that's "underwater" -- worth less than the amount of debt. Fortunately, neither you nor the owner's estate has to pay the difference. A key element of a reverse mortgage is that the lender can't claim more than the value of the house. All the estate executor has to do is turn over the deed to the lender and the debt is disposed of.
If there's equity left in the home, you can still sell the property. This is a simple way to settle the debt. Once the home sells, the lender gets reimbursed and you get any leftover money from the sale. Another approach, if you or the estate has the money to spare, is to pay off the loan outright. Of course, if the estate pays it off, that reduces the money available for others to inherit.
If you want the house but can't afford to pay off the loan, one option is to take out a mortgage yourself. A large enough mortgage would let you pay off the reverse mortgage in one lump sum. However, instead of inheriting the property free and clear, you're now on the hook for the mortgage loan. The "Chicago Tribune" notes that if your parent is accruing a high rate of interest on a reverse mortgage and you foresee eventually receiving the home yourself, you might consider buying the house from your parent now and financing it at a lower interest rate, which might ultimately save you some money.
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