What Happens to a Reverse Mortgage When It's Inherited?

iQuanti: Reverse mortgages provide many benefits for retirement-aged homeowners who want to tap into their property's equity. With a reverse mortgage, borrowers can access cash to help fund their retirement and cover their expenses without having to make monthly payments on the loan.

The question is: What happens when and if the reverse mortgage is inherited by your heirs?

It's important to understand how this unique type of loan will affect your family members, so you can best set them up for success and make the most of your home ownership.

What is a reverse mortgage?

A reverse mortgage is a type of loan available to Canadian homeowners age 55 and older. By taking out a reverse mortgage, a borrower can turn their home equity into tax-free cash, which they receive either as a lump sum or in installments. Many then use this cash to supplement retirement income, pay off debts, or cover healthcare expenses.

One of the biggest benefits of a reverse mortgage is that it doesn't come with monthly payments. Instead, the interest is added to the overall balance, and the loan is repaid when the property is sold or the owner passes away. The proceeds from reverse mortgages are also tax-free and don't affect other government benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS).

To qualify for a reverse mortgage, the borrower must use the home as their primary residence, and be prepared to pay for independent legal advice, an appraisal fee, and any applicable closing costs.

How does someone inherit a reverse mortgage?

If a homeowner takes out a reverse mortgage and passes away before repaying, the borrower's heirs will inherit the mortgage. If the home is also owned by another surviving family member, such as a spouse, however, the mortgage still stands until that person passes away or decides to sell or move.

What happens when a reverse mortgage is inherited?

When a reverse mortgage is inherited, the loan provider will typically set a time period — such as 180 days — within which the heirs have to pay off the balance.
At this point, the heirs have a few options:

  • Sell the home, often using some of the proceeds to pay off the reverse mortgage balance, including the interest and fees
  • Keep the home and pay off the loan using other funds

If and when the heirs decide to pay off the loan, they may still be able to pocket any remaining equity. With rising home values, the loan amount will likely not exceed the value of the loan. If the value of the loan is greater than the value of the home, the good news is they won't have to pay for the overage.

Reverse mortgages can be helpful financial tools for retirees who own property, but they come with their own unique terms and requirements. As such, homeowners should take time to consider the ins and outs of reverse mortgages, and understand just how this loan might affect their family's finances.

Source: iQuanti, Inc.


Categories: Mortgages and Loans

Tags: loans, mortgage, reverse mortgage