The Kid's Inheritance: .... and Issues Associated with Financial Security of Partner
The Question is: “If I have a Reverse Mortgage, what happens when I die?” Including the subject of “The Kid’s Inheritance” and issues involving “The Financial Security of one’s spouse or partner”.
I highly recommend first, for a quick overview of information to get a general idea of this subject area, just read the bold type, then just call me, (Robert Fulton 360-222-3236) and we will visit and go into great detail on your specific situation. You are welcome to read the complete narrative, while that will help you to learn more, but the generalization is likely to be, just that, very general.
As it says above this is what happens when you die, so now that you have died, the home you have been enjoying living in without having to make a mortgage payment is longer your primary residence. Therefore the lender is going to give your estate six months to sell the house or otherwise payoff the mortgage. If you owe more than the house is worth, do not worry, FHA will step in and pay that shortfall, this protects your estate or heirs. I will explain more in detail.
I will expand that answer in a fashion to also increase your understanding of the Reverse Mortgage Product and how it relates to this subject.
Let me base my answer using my first example, which is the scenario that you took out a reverse mortgage three months before your death.The same thing that would happen (now before you took out the reverse mortgage), if you die, less a couple of small adjustments for those last three months, namely that of deferred interest, mortgage insurance and of course the closings cost, if any, to get the mortgage. When your estate sells the property for the benefit of your heirs the estate will receive the gross sales proceeds from the sale price, less the closing costs, less any outstanding mortgages. In other words your estate recognizes the net equity, and your will or operation of law will hopefully disburse your remanding equity according to your wishes. That is about the same process of any transaction when you have on a home with any mortgage. That is also the same answer if you go to sell your house when you are alive after you take out the Reverse Mortgage. One of those adjustments for those three months is that the house may appreciate in value and you as the owner on title get that increase in value factored into that formula. For example if those three months were from December 15, to March 15, the market could really show some improvement (of course the value could also go down). One of the side points I would like to make here is that any negative affects from the equity erosion occurring from the fact you are not any longer paying in on a mortgage takes time, and works against any appreciation over time. This is best seen by looking at the amortization schedule included in the initial educational proposal I will be providing for you on your property.
I give this first example, to share how in the short term, the component of real estate market could do better having the house go up in value than the costs of the loan and the small adjustment over three month from accumulating deferred interest and not having sent in any payment. (I will expand on this short term example below using the number from my own mortgage).
Next understand that since you recently refinanced your home to get the reverse mortgage and if there was closing cost to do that and if you built those in to the loan “so to speak”, using loan proceeds then of course that like doing ANY refinance will use a little of that equity up. This is not just about reverse mortgages, it is about any type of refinances, including normal forward mortgage. Therefore it is ALWAYS important to be sure that your “time horizon” is to hold the property long enough to get the benefits of any refinance. Again, this is the case also when you refinance a normal forward mortgage to a reverse mortgage.
The next phase to the answer is if you live longer then three months. How does this answer change, should you procrastinate dying by 7 years or 17 years or even 27 years. FYI, this is one of those situations or circumstances when procrastination is not a bad thing to do. So that will be what I am going to address.
First remember the reverse mortgage, call a HECM standing for Home Equity Conversion Mortgage, over time converts your house equity into financial and non financial benefits. It see it as a mechanism to let your house pull its own weight and support its self while it provides a place for you to live while allowing you to redirect your money into the quality of your life.
I feel strongly you need to look at things on this subject “in context” as well as “out of context”. Some journalist have found it news worthy, to specifically, reporting the “out of context” point of view. Just looking at the equity in the house, over time it diminishes, erodes and or reduces. Since you still hold the title, and if the house goes up in value, that value being yours will help to offset this but over the long, long run will only slow down the process of equity erosion. Keep in mind any asset you elect to spend down will experience equity erosion, not just house equity, a bank account, mutual fund, IRA or 401(k). Using some of those is a taxable event which really will erode that asset. However consider all other assets that you have, once the funds are all gone you will not any longer be able to enjoy any financial or non financial benefit from them. But here with this concept using the HECM even though all you equity has been converted and the mortgage may become much larger than the value the property you may still live in your home rather than be paying rent some were. That’s a big benefit, and one that you do not have now, and FHA is there to insure that your estate will not have any loses when your home is sold.
So looking at the “In Context” prospective, looking at the economic value of all the benefits you receive over time and the peace of mind from the “non financial” benefits along with the specific negative aspect usually results in a very positive out come.
What about The Kid’s Inheritance
This is of course the name of the page, or core question, and even though you may not have children it will help you understand much more about the reverse mortgage concept. Normally, at least I would hope by the time a parent dies their adult child would have their own home and with its own mortgage. Rarely would they be looking to live in your specific home. Generally they associate their inheritance with receiving cash proceeds. After analyzing to total affect of the parents having a reverse mortgage the story has a pretty good ending. One must still ask if this is about the kids or about them. Generally it should be about you, and your life first and then the kids. If it is about the kids, and I doubt it is, then review and study the concept of redirecting part of what you are currently paying in mortgage payments now into life insurance. So if it is about the kids, assuming you are insurable, you could opt to give them a real windfall. But normally, such proceeds are directed to first go to you partner’s income needs.
You will learn that this story has an ok ending. But I feel the most important thing you need to protect your children from, are their feelings that can arise from their misunderstandings about this subject. You should not underestimate this concern. It is not a lost of an inheritance from you caused by you getting a reverse mortgage that you or they need to worry about, but their initial perception of that taking place. I will show how when understood in an “in context” or global point of view, that, that is a misconception. Normally these misconceptions that they will have will be cleared up, when, but not until they are totally informed about this complicated subject in its entirety. These initial false perceptions can cause a strain on the relationship and you should take steps to proactively avoid them. This should not be done by not getting a reverse mortgage if you are right for one, but by educating your children about the whole subject, best done by you sending them to this website. I often meet with them or talk on the phone. They become comfortable once they understand that the benefit to the overall family’s financial welfare (including theirs) will in fact be improved by this change. Learning the proper coordination of the spending down of their parents financial and non financial assets will extend the period of their parents own financial independence. This will protect them from, the risk of having to step in and use their own funds for helping their parent have housing like my brother and I had to. They will see how the parents now being able to choose which financial assets they spend down and when, how this technique will help preserve they overall financial holdings. In other words protect cash assets like bank accounts, brokerage accounts and IRAs. I feel, by learning how to let the FHA be the deep pockets to underwrite the family’s risk of you funding your need for housing for years into the future. With this method we now essentially have in some ways, unlimited resources, of FHA claim money for your housing. This is compared to, using your bank accounts and other financial asset and also for your heirs, not needing to be on standby to use theirs, either. So that is a lot better for them, financially as well. On the other side of the coin, conversely, you could sell your home take the net equity and but it in the bank and use it to pay rent. Check out how much rent is for a place you would be comfortable living in. Having to withdraw each month to pay for your rent to provide housing would have the limited buying power from what is in that bank account with no assurances that you will be able to maintain that commitment. In other words you may not be able to die before you run out of money in that bank account. If you have enough money in the bank that the interest income credits monthly will cover all your monthly needs and even build reserves than you may be a non candidate for a reverse mortgage. However in either case, electing the Reverse Mortgage option, you will have not the cost of rent, you will have no mortgage payment, and only have to pay property taxes, homeowners insurance and the cost of maintaining the home. Depending on your equity level you, may not only be able to have no mortgage payment, but be able to draw systematic checks, to cover those expenses of taxes and insurance, like many people do.
This can be a very complicated subject and I will now share some other related subjects and thoughts.
I will help you assess this subject and quantify this risk, if it applies, explore how to deal with it as specifically relates to your situation when we meet in person. This narrative starts off giving you an overview to understand the basics as I see them. How I see them is of course my opinions based on my education, training and experience. Then the narrative goes into great detail and as much depth on the subject as you would like, including sharing just what my education, training and experience is on this subject which is extensive. I will share my quick opinion in one sentence or paragraph, from my experience:
I always say, “The best gift you can ever give your kids is for you to remain financially solvent for as long as possible.” If you do not take care of yourself now you will not be able to be there to help take care of others in the future. ”
Whenever I hear someone’s opinions, read a book or even an article I always want to know the orientation for the author so I understand their prospective on the subject. So I am going to do that.
This of course is my course is my favorite subject and most amusing since I grew up selling life insurance for a living and receiving a lot of training and education in that field resulting selling over 1000 life insurance policies. This client base became my customer base when Fulton Financial Consultants, Inc. became a mortgage broker in 1998. So my background “professionally” for about 25 years was trying to get people to talk with me about “What about, my spouse’s financial security and my kid’s inheritance”. So let me tell you, those were the hardest 25 years of my life! After that or since then that same clientele has applied for over 1300 mortgages through me and never ever can I remember more than a handful of times anyone even asking anything about, “oh what happens when I die?” So go figure. Oh, by the way those 25 years started when I was 25 years old, I am 69 now. My background personally, also give me experience too as, I have experience my own two parents both passing in 2003, only three months apart and my father (while married to my step mother of 34 years) died while living in their house with a reverse mortgage . I have two adult children and I am blessed with two grandchildren and have these subjects on my mind as a father.
So if that does not make me qualified to have a valid prospective on this subject, I would like to know what would.
A normal or regular mortgage now called a forward mortgage that you pay payments on, has is fully amortized or positive amortization (or sometimes called fully amortized) which builds equity in your house but may deplete your other personal financial resources making those payments. A Reverse Mortgage has negative amortization which leads to erosion of the equity in the house, since you are systemically over time converting it, rather than using your other cash assets, so it should preserve those other financial assets or even allow redirection of what was previously paid to the mortgage company monthly, can now be deposited into the bank accounts. I will show how it is your other subsequent decisions financially after you take out a reverse mortgage can have a major affect the amount of estate you live behind and how much you have to live on in the future. I will show multiple examples of this and how you need to study the whole picture financial to see if you are right for a reverse mortgage.
First I must help you understand and think about the three corners of the triangle relationship between, net worth, equity and peace of mind. I probably should say that, for me, liquidity is in the category of peace of mind, and equity can be in the form of house equity or money in the bank, investments, or the cash value of a permanent life insurance policy. But the different levels of peace of mind are different for each.
When we enter our spend down period it works against our peace of mind. I would find it painful to have any equity account erode (caused from sending down). In the short term (just this month) I would find it less painful to lose $732.00 of house equity than $732.00 in my savings account. I will share where that odd number came from.
I said above I would expand on the short term three month example above using my own mortgage and example above as it relate to net worth vs equity. Although, I am still a “non candidate” for a reverse mortgage, my current situation is pretty typical so that is why I will use my own numbers for a few examples to expand on the “three month” example I started above. I have a regular forward 1st mortgage with a PITI (Principal, Interest, Taxes and Insurance), payments of about $2,300.00 per month.
I will break this down for you. The Taxes and Insurance (TI) part going into what we call and escrow reserve impound account is about $626.00. This leaves the Principal and Interest part (PI) per month to be $1,673.00 per month. Of course the part of that which makes me happy is the “Principal” part or component of that payment, which is $732.00, this is of course the amount which goes into the equity in my house. I might add a very non-liquid equity account. In the next three months it will build up about $2,200.00 in to that equity account. When the time comes and I can get a reverse mortgage, I will still have to pay to the county my property taxes and to the insurance company my homeowner’s premium and flood insurance premium. I will need to budget about $632.00 per month for that, as you just learned above. But I will be able to redirect the $1,673 per month into a highly liquid financial account, even a normal passbook savings, actually that would feel good to me. I will call this my “Side Fund” account. (I will expand on my options for that, other than a bank account, later, or below as time allows, or with you in person).
So using very simple math, redirecting my $1,673.00 per month in to my side fund (bank account) will save up over $5,000.00 in cash in just three months. This is 100% totally liquid cash I can access in just a few moments since it is sitting in the bank for an emergency.
In comparison in my current mode, I am sending that $1,673.00 to the mortgage company to get the $732.00 credit increase to my non liquid savings.
Let’s compare and contrast these two scenarios and see where they lead. In the first scenario, I like building up $732.00 of non liquid savings in my house equity toward my goal to pay off my house in the future. Base on my current schedule paying one payment at a time I will be 90 years old before I get to enjoy the financial freedom afford by not having a mortgage payment. I will likely have moved on by then anyway because of my ability to physically live here, so I will never get to enjoy that freedom that will come with no payment from one payment at a time.
In the second scenario, I see the redirection of my $1,673.00 is still in fact having a monthly commitment of $1,673.00 month but that payment is a payments to me, and going into my bank account, which I can elect to stop anytime I needed to if my income looses buying power or spend down my other assets. I will no longer be sending that $1,673.00 to the mortgage company which will force me to wait many years to realize a benefit from that. I can use that funding to build up my nest egg and holdings outside my house equity which will better enhance the quality of my life in the future once I elect to start my traditional retirement or just want to slow down to part time or just get to old to work. Ironically it will allow me to keep my current lifestyle longer which I really enjoy.
So, for me personally, the first scenario would never get me to my goal because I will be so old I would not ever remember I had a mortgage! LOL. But this is not about me, it is about you, your situation, and what your goals are. I would like the opportunity to sit down with you and have a discussion and still if your life can be improved with my product and service.
Please remember everything on this website is my sole opinions and not necessary those of any of the lenders which I (Fulton Financial Consultants, Inc.) offers products for or from. Because things in my field keep changing be sure to discuss any specifics before make life changing decisions based on what I have presented. This website is for general information only and a personal visit with me is the best to address your situation. Please give me a call, 360-222-3236. Thanks.
This Site is Not Tax or Legal Advice. Always consult Legal Counsel and Your Tax Advisor. Content of website are the sole opinions of Robert Fulton & does not necessarily reflect those of Fulton Financial Consultants, Inc.'s Investor/Lenders or insurance companies or other product vendors. Because one of my product lines is that of Reverse Mortgages I must state the following: If the borrower does not meet loan obligations such as taxes and insurance, then the reverse mortgage will have to be repaid." The Terms, benefits and features shared as accurately as possible on best efforts basis and subject to change without notice. Therefore please discuss any decision making specifics with Robert Fulton 360-222-3236. "This material is not from HUD or FHA and has not been approved by HUD or any government agency."