You may have decided to cash in on your home’s equity by applying for a reverse mortgage. You are not alone. Many seniors get reverse mortgages to supplement their retirement income, maintain their financial independence, pay for travel, finance healthcare needs, or to pay off the mortgage and finally get rid of those mortgage payments.
There are a lot of benefits to a reverse mortgage. Seniors will not have to make payments on their reverse mortgage or the accruing interest as long as one spouse is still living in the home.
Unfortunately, a reverse mortgage isn’t a pot of gold. Eventually that money will have to be paid back. The most popular type of reverse mortgage (a Home Equity Conversion Mortgage) must be paid back in 12 months after the last spouse leaves the house. In most cases, the bank will sell the house to pay back the reverse mortgage plus the interest that accrued on the loan.
Should I Keep My Home In A Trust?
Many couples assume that applying for a reverse mortgage means that they will be giving up their house to the bank when they are gone. As a result, they may see no reason to include the home in their trust.
This thinking is a mistake. While the amount due on a reverse mortgage may end up being the full profit of a home sale, that is not always the case. There are plenty of instances where there is money left over from the sale of the home, which can go to heirs if the house is placed properly in a trust.
This can be a little confusing, so let’s look at an example.
George and Caroline are both 70 years old and own a $500,000 home in Sacramento. George recently suffered a stroke and needs an in-home care worker during the day to help take care of him. The couple decides to apply for a reverse mortgage to help cover the cost of George’s health needs.
Their local bank offers an HECM loan for 70% of the equity of the couple’s home, which comes out to be $350,000. George and Caroline decide to receive the reverse mortgage money as term payments of $2,500 per month. A year later, George dies, and a year after that Caroline moves into a nursing home. If Caroline stays in the nursing home for 12 months, the reverse mortgage will have to be paid back. At this time, the payments will have been coming for only 36 months, not nearly long enough to deplete the amount available from the reverse mortgage. When the bank sells Caroline’s home, there will be plenty left over even after the bank takes its share to cover all the costs related to the reverse mortgage.
If Caroline and George put their home in a trust, those leftover funds would be given to the trust, thus avoiding probate after Caroline’s death.