Reverse mortgages bring up estate questions that do not necessarily apply to normal mortgages. Of course sometimes when a person dies before they pay off their home loan some of the same rules apply. The rules for this type of loan are the same rules that apply to any debt owed by an estate regardless of the type of loan.
Understanding the Terms of Your Estate
If a person dies before the reverse mortgage is fully paid or the debt returned, the house will be sold on the open market. The proceeds of the home go to pay the reverse mortgage. In most cases, this amount is enough to pay off the outstanding balance. Sometimes the amount is left over. The remaining funds go to the estate. If the person does not have a will, the estate goes to the state government and the bank usually cannot collect funds.
A person who designates an heir or heirs as the recipient of his estate faces a different issue. If the reverse mortgage does not get paid off after the sale of the home, the inheritors of the estate must pay any outstanding debts. It is possible for family members to owe money on a reverse mortgage when the original home owner dies.
How Can I Prevent Family Members from Owing Money?
The best way to prevent family members from owing money is to only take out a reverse mortgage on the value of the home that you think you will need. Save some of the equity to cover changes in market conditions and the interest on the loan. When the owner dies, the proceeds after the loan, taxes, and fees are paid can be split among the heirs of the estate. The bank may also sell an insurance policy to pay off the remainder of a reverse mortgage if the sale of the home does not provide enough money.
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