Dear Dr. Don,
My father has a reverse mortgage on his home. When the time comes that he eventually passes away, does the mortgage company require that the balance of the loan be repaid? Or do they take control of the property? The value of properties in his neighborhood has increased since he took the reverse mortgage.
-- John Juncture
I don't know how you missed all the ads, with celebrities like Henry Winkler, Pat Boone and Fred Thompson all extolling the benefits of reverse mortgages. The ads state that the homeowner continues to own the home.
Any remaining equity remains with homeowners. If your father stays in the home until he dies, whoever inherits the home would have to pay off the loan balance. That includes the capitalized interest on the loan over the time the loan was outstanding. There is one important exception noted below. They could achieve this through the sale of the home or by taking out a new conventional mortgage on the property.
Failing that, the lender could take control through foreclosure and sell the property. Even then, any remaining equity from the proceeds remains with the estate, not the lender. If you're worried that your father's estate won't retain the appreciation in property values, worry no more.
Federal regulations require reverse mortgage lenders to provide up to a 30-day window for the heirs to determine what they'll do with the house. Should they choose to keep the house, a period of time of up to six months is allowed to arrange a sale or financing.
There is also a federal rule that allows heirs to pay 95 percent of the current fair market value of the property to pay off the loan if the amount is less than the loan balance. That would be helpful in markets where home prices have been suffering. Fortunately, that doesn't sound like it is the case where your father lives.