Reverse mortgages provide a way for senior homeowners to tap into their home equity without selling their house. The cash they receive can help fund their retirement, pay for medical expenses, or cover other costs. However, as with all loans, a reverse mortgage isn’t infinite. What happens when a reverse mortgage runs out? This article explores the aftermath and offers insights into planning for this eventuality.
Understanding Reverse Mortgages
Before we delve into what happens when a reverse mortgage runs out, it’s crucial to have a firm grasp of how these loans work. A reverse mortgage is a loan available to homeowners aged 62 or older, allowing them to convert a portion of their home equity into cash. Unlike traditional home loans, reverse mortgages do not require monthly repayments. Instead, the loan is repaid when the borrower leaves the home, sells it, or passes away.
What Does It Mean When a Reverse Mortgage Runs Out?
When we talk about a reverse mortgage running out, it typically means one of two things.
First, it could mean the homeowner has tapped into all the available funds from their reverse mortgage. This situation is relatively rare because the homeowner would need to live a long time or borrow a significant portion of their equity up front.
Second, it could mean that the homeowner can no longer meet the terms of the reverse mortgage. This situation could occur if the homeowner moves out of the house, fails to pay property taxes or homeowners insurance, or cannot keep up with necessary home maintenance.
Scenario 1: Using All Available Funds
If a homeowner exhausts the available funds from their reverse mortgage, it does not mean they will be forced out of their home. They can continue living in their home as long as they adhere to the terms of the loan agreement, such as paying property taxes and maintaining the home.
However, it’s important to understand that when the reverse mortgage funds run out, no additional funds will be available from this source. Homeowners in this situation will need to find other means to cover their expenses. They might turn to personal savings, pensions, Social Security, or support from family members.
Scenario 2: Failing to Meet the Loan Terms
If a homeowner fails to meet the terms of their reverse mortgage, the loan becomes due and payable. This means the homeowner or their estate must repay the loan. Typically, the most common way to repay the loan is by selling the house.
If the home sells for more than what is owed, the homeowner or their heirs get to keep the difference. If the home sells for less than the loan balance, the homeowner or their heirs are not usually responsible for covering the shortfall, thanks to the non-recourse feature of reverse mortgages.
When homeowner passes away and the heirs want to keep the house, they have the option to repay the reverse mortgage. They could use personal funds, take out a new loan, or sell other assets to raise the necessary cash.
Mitigating Risks
Understanding the possible outcomes when a reverse mortgage runs out can help homeowners plan for these situations. Here are a few strategies:
1. Consider a Line of Credit
When taking out a reverse mortgage, consider opting for a line of credit instead of a lump sum. A line of credit allows you to draw funds as needed, giving you more control over how much you borrow and when.
2. Keep Up With Home Maintenance and Taxes
Failure to pay property taxes, homeowners insurance, or keep up with home maintenance can lead to the loan becoming due. It’s crucial to budget for these expenses to ensure you can meet these obligations and avoid jeopardizing your loan.
3. Understand the Implications for Heirs
Discuss the reverse mortgage and its implications with potential heirs. While they won’t be responsible for repaying any shortfall if the home sells for less than the loan balance, they will need to repay the loan if they wish to keep the house. Open communication can help avoid misunderstandings or surprises later.
While a reverse mortgage can provide a valuable source of income during retirement, it’s essential to understand the implications of the loan running out. Planning ahead and understanding the loan terms can help you navigate this complex financial tool effectively and avoid potential pitfalls. As with any major financial decision, consider seeking advice from a trusted financial advisor or counselor before taking out a reverse mortgage.