Reverse Mortgages May Leave Financial Nightmare for Heirs

 Posted on October 20, 2014 in Estate Planning

An investigation by The New York Times has revealed that there could be a serious financial backlash to the heirs of senior citizens who take out reverse mortgages. The revelations from the investigation may have seniors reconsidering other estate planning options and avoiding taking out reverse mortgages.

Reverse mortgages are available to homeowners 62 year old or older. A reverse mortgage allows the homeowner to borrow against the equity of his or her home, but the loan does not have to be paid back until the homeowner moves out or dies. Therefore, there are no monthly payments. There is, however, some disagreement over whether or not reverse mortgages actually benefit or hurt the senior homeowner.

When a person with a reverse mortgage dies, under federal law, his or her heirs are supposed to have the option of settling the loan amount for a percentage of the full amount owed. However, the Times investigation discovered that many reverse loan companies not only do not offer heirs that option, but instead threaten to foreclose on the properties unless they pay the mortgage in full.

Usually, the amount an heir should be required to pay is approximately 90 to 95 percent of what the property's current value is worth. If there is a shortfall between what that amount is and what the amount of the original load was, and that difference is supposed to be covered by a federal insurance fund. Mortgage companies that offer reverse mortgages are required to pay into this fund every month.

Yet hundreds of heirs are never given that information when their loved one dies. In many cases, the threats of foreclosure begin arriving in the mail just weeks after homeowner's death. The investigation found this crisis happening across the country and the housing advocates and elder care counselors they interviewed suggest that it has happened to tens of thousands of people already, and they predict those numbers will continue to grow.

According to the Federal Reserve, the combined debt of people between the ages of 65 to 74 is increasing faster than any other age group. Hence, it is critical to begin formulating your estate plan sooner rather than later. It is never too early to ensure that you have protected and provided for your loved ones when you are no longer here. Contact an experienced DuPage County estate planning attorney today.