Reverse mortgages costing some seniors their homes

This story from the New York Times talks about seniors who have taken on reverse mortgages believing they could never lose their homes, but who have nevertheless lost their homes. The article gives some examples of how this has happened to people who didn't do anything wrong. It paints a pretty dim picture of some of the less reputable people selling reverse mortgages.

As with any financial arrangement, you have to have a thorough understanding of what you're getting into but it appears that many senior are signing up without that knowledge.

I recommend that anyone considering taking out a reverse mortgage, or who already has done so, should read this article. Although the article is American, the principles apply here in Canada as well. Click here to read the article.

When to back away from a reverse mortgage

Here is a little sound advice from Kyle E. Krull, estate and financial planning lawyer, about the dangers of reverse mortgages. He doesn't say never to use them; he has some advice about how to use them properly. Click here to read the article.

Reverse mortgages: the good, the bad and the ugly

This article by Audrey Miller discusses the pros and cons of a senior taking a reverse mortgage to provide cash to allow the senior to remain longer in his or her own home. Click here to read it. The article raises an interesting point - a reverse mortgage is repaid when the homeowner dies or sells the house, which may leave less money in the estate.

Some parents specifically say that they want to leave as much as possible to their children. Sometimes this is because a child is handicapped and will need to be provided for. Sometimes the child lives with the parent and devotes much of his or her life to helping the parent. In other cases, the parents just want to help the kids in general and make their lives a bit easier. Regardless of the motivation, as a person considering taking a reverse mortgage, the idea of leaving a larger estate is something for you to seriously consider. If leaving the maximum amount in the estate is important to you and there are other ways of affording to live at home, perhaps a reverse mortgage is not the best way to go.

My personal view on this issue is that the senior should do what he or she needs to do to live the way he or she feels safest, happiest and most comfortable. If this means less money for the children later, so be it (with the exception of a handicapped child). I've seen many seniors living in poor conditions, with inadequate nutrition and insufficient assistance, just to leave an enormous estate to the children.

Many parents naturally put their children ahead of themselves, but sometimes they take it too far.

How do reverse mortgages compare to conventional mortgages?

I've found this article by Beth Paterson that compares a reverse mortgage to a conventional mortgage. I found it useful since all of us are familiar with how conventional mortgages work, but not so much with the reverse mortgage.  Click here to read the article.

When I inherit a house, do I inherit its mortgage too?

Since most people own their homes and pass all of their property (real and personal) down to their children, most estates contain a house. In this post I'm not going to discuss the wisdom - or more aptly, the lack of wisdom - of naming all of the children as joint owners of the house after the parent's death, as I've covered that in other posts. In this post I want to talk about the mortgage that is attached to the house.

If you are inheriting a house from your parents, do you inherit the mortgage as well? The general answer is no, but there is more to it than that.

The debts of the deceased must be paid before the beneficiaries receive their inheritance. The mortgage is a debt of the deceased that happens to be secured by the house. The mortgage must be paid before the house is able to be transferred to anyone else.

This is where it sometimes get complicated. The debts of an estate are paid from the residue of the estate, that is, the general resources of the estate that are not named specifically to be given to a certain person. For example, if a Will said "leave my wedding ring to Betsy and my watch to Gerald, and the rest is to be split between them", then the portion of the estate referred to here as "the rest" is the residue of the estate. The wedding ring and the watch are not in the residue.

The mortgage has to be paid out of the residue. Hopefully there are bank accounts, RRSPs, investments or other property that can be sold for cash, or a life insurance policy that names the estate and creates new cash flow. If so, there is no problem paying the mortgage, clearing the title on the house and then transferring it to the beneficiary. Other debts must be paid from the residue as well, including the funeral, income taxes, legal and accounting fees, probate fees, and any other loans or bills of the deceased.

But what if the residue of the estate is not enough to pay the mortgage? In that case, specific gifts such as the ring and the watch might also ending up being sold. Most likely, the house itself would be sold to pay debts.

Sometimes at this point, one of the children of the deceased will offer to buy the house from the estate (free of the deceased's mortgage) using his or her share of the estate as a down payment on the house. No matter what options the family may choose, the mortgage must be paid out before anyone else may own the house.

Research reverse mortgages before you need one

A reverse mortgage is often described as a way seniors - those who are house-rich but cash-poor - can continue to live in their homes and generate extra tax-free cash flow. There's a good article in the Financial Post attached. Click here to read it.