On behalf of Jill Metz
Most people are at least generally aware of the importance of estate planning. Typically, when one thinks about estate planning, it brings to mind someone executing a last will and testament so their worldly possessions can pass as they desire to their intended beneficiaries. Somewhat more rarely does estate planning bring to mind a reverse mortgage. However, there is a type of reverse mortgage-known as the private reverse mortgage-that definitely falls into the category of estate planning.
The traditional reverse mortgage, famously hawked on television by Fred Thompson and Henry “The Fonz” Winkler, was designed as a way that seniors age 62 and older can tap into the equity in their home while continuing to live there. U.S. News and World Report notes that there are reasons to think twice about a traditional reverse mortgage. First, the fees and interest on a reverse mortgage are often higher than the rate for a home equity loan. While it is your equity in a house which is being tapped into, banks receive surprisingly high amounts of that equity and you could be surprised at how little money you actually receive.
Second, with a traditional reverse mortgage, the person you desire to leave your home to may not be able to keep the home. If you die, the home often ends up being sold to cover the loan amount plus interest and fees. An heir cannot keep a house bequeathed to them which is subject to a reverse mortgage unless they pay off the mortgage. If there is not sufficient money in your estate to pay off the mortgage, heirs have to come up with the money themselves to keep the home.
Consumers Union warns that reverse mortgages are very expensive loans and should be considered only as a last resort. The Christian Science Monitor reports that one alternative to a traditional reverse mortgage is to turn to a family member or friend who has sufficient means to finance a private reverse mortgage. The private loan would be secured by a deed of trust on the home. The family member or friend would regularly forward funds to the senior with the transactions being fully documented. The lender can think of the private reverse mortgage as an investment. After all, he or she will end up owning the home once you die.
One person was quoted in the CSM article as observing that it is in the fundamental interest of both the would-be heir and the senior citizen to preserve the inheritance rather than having the senior’s home ultimately sold in order to pay back an institutional lender’s reverse mortgage loan.
According to the Bankrate.com website, one highly attractive feature of a private reverse mortgage is that the upfront costs are going to be much lower than a traditional reverse mortgage. Indeed, the costs associated with a family lender should be only a fraction of what they would be if the senior dealt with an institutional lender. Instead of interest and fees going to a bank, the money and home stay within the family. The authors of the Bankrate.com and CSM articles advise that you should consult with an estate planning attorney if you are interested in a private reverse mortgage.
Seeking legal counsel
If you are a senior who is interested in a private reverse mortgage as part of your estate planning objectives, you should consult with an Illinois attorney experienced in estate planning.