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Dear Senior Living Adviser,
My husband and I took out a reverse mortgage in November 2012, but I was not named on the loan. With the recent HUD mortgagee letter protecting surviving spouses, I no longer have to worry about being displaced in case my husband dies before me. However, I am concerned with the loan balance growing and leaving no equity for my grandchildren.

Does it make sense to try to keep the loan from rising at this point, or do you think it may be better to take out a life insurance policy to help my heirs obtain the home after my husband and I have died?

The loan is at a fixed rate of 5.06 percent. The outstanding loan balance is $223,511.90, and the market value of our home is $400,000. I’m 61 and my husband is 66.
— Helen Homebody

Dear Helen,
Typically, people take out a reverse mortgage as soon as they can at age 62 because they really need the money they can borrow from the equity in their home. There’s not a real expectation of holding on to much, if any, equity in the home when they die or trigger a loan repayment by leaving the home for 12 months in a row. The loan balance grows year over year by the loan’s interest expense.

You’re four years into this reverse mortgage, which is also known as a home equity conversion mortgage, or HECM, and your letter reads like you’re re-evaluating your goals for the equity in the home. One option would be to take out a conventional mortgage to pay off the reverse mortgage. You would have to have the income and credit history to qualify for that new mortgage. Assuming you qualify, you will go from no mortgage payment to a monthly mortgage obligation for the next 15 to 30 years.

Using an insurance policy to pay off the reverse mortgage isn’t likely to be a less expensive solution than taking out a conventional mortgage. The policy has to have a premium high enough to cover the loan balance, which is increasing over time, at the time the reverse mortgage loan comes due. If you want your grandchildren to inherit some money from your estates but not necessarily inherit the home with no outstanding mortgage balance, insurance may be an option.

How much equity you’ll have in the home when the reverse mortgage loan comes due depends on what happens to housing prices over time. I’ve put together an example, factoring in your fixed-rate loan with a 5.06 percent interest rate and assuming a 3 percent appreciation in home value.

Reverse mortgage scenario

Today’s value Projected value in 20 years
Market value $ 400,000 $ 722,444
Loan balance $ 223,512 $ 613,596
Home equity $ 176,488 $ 108,848

The higher the rate of appreciation in the market value of your home over time, the more likely it is that you’ll have equity in the home when the reverse mortgage loan comes due. Then, the heirs have to make the decision about whether they want to finance the outstanding balance and buy the home.

A HECM gives the heirs the right to buy the home at 95 percent of the appraised value of the home when the loan comes due, which comes into play when the home doesn’t appreciate as expected over time.

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