The End of a Reverse Mortgage: What Happens?

During my considerations for a reverse mortgage, one of my first questions was “how does it end?”.  Traditional “forward” mortgages have an amortization schedule and a fixed term on them that is very clear - but what about a reverse mortgage?

Reverse mortgages come due and require payment when the borrower:

• Passes away
• Permanently moves (the home is no longer the primary residence)
• Sells the home

I had the most questions about getting a reverse mortgage and what happens when I pass away.  My plan was to make my reverse mortgage the last mortgage I’d ever have.  Given that they last the rest of my lifetime (as long as I stay in my home as my primary residence), the two biggest questions I had were, once I pass away:

1. What happens to the house?  
2. Will my children (heirs) be responsible to re-pay my loan?

Let’s tackle the second part of that question first.  My children (heirs) are not responsible for paying back my reverse mortgage loan.  They are, however, part of the decision making process for what happens to the house.

After my passing, my children have 3 options:

1. Keep the house and pay the balance of the loan.  This is a great option if they want to keep the home in the family
2. Sell the house and keep the equity.  Since there are limits to how much you can borrow with a reverse mortgage, and you need equity in your house to qualify, there’s a chance that  when selling the house, the sale price may be more than the amount of the loan.  In this case, my children would keep whatever is leftover
3. Do nothing and let the bank sell it.  Again, the kids aren’t responsible for the loan, so ultimately the bank can sell the house to recover the debt

These questions actually brought up more questions.  What happens if the value of my home decreases over time?  Wouldn’t the bank lose money if they sell it for less than the amount of the loan?

The answer to that is: not really.  To participate in a reverse mortgage, there are a few fees involved (read this blog post to learn more).  One of those fees is mortgage insurance through the Federal Housing Administration (FHA).  This insurance is what helps protect the bank to cover losses in the situation where your house sells for less than that amount of the loan and a balance is remaining. 

This is a good time to suggest reading my blog post “Fees Associated With a Reverse Mortgage” [insert link].  There’s a lot to digest with reverse mortgages, and I’ve found it the most helpful to learn in smaller portions.  Knowing that my children would not be saddled with my loan was an important answer to a big question.  It would be a deal-breaker for me if that was not the case.