Is a reverse mortgage better for estate?

Q: I am 83 years old, and my only asset is my condo. I am trying to plan my estate to benefit my cousin, who lives in a different state. She suggested I get a reverse mortgage so she will not have to sell my condo. After doing research and getting a quote, I am flummoxed and don’t trust the whole concept. I would appreciate your advice. — Bernice

A: There are many tools you can use to plan your estate to make things easier for those you leave behind.

As the name suggests, reverse mortgages work like a regular mortgage loan, but in reverse. With a traditional mortgage, the borrower receives the entire loan amount and spends a fixed amount of time, typically 30 years, repaying their lender. With a reverse mortgage loan, the lender lends a lower loan amount based on the borrower’s age and the home’s value and then uses the home’s remaining equity to make the monthly payments.

This means that every month the balance owed to the lender grows. The borrower does not have to make monthly payments, and the lender must wait until the borrower sells, moves out, or passes away to get repaid.

These loans are “non-recourse,” meaning the lender is limited to collecting no more than the value of the home when being repaid and cannot charge any deficiency against the borrower’s remaining estate.

Unless a borrower passes away shortly after getting the loan, there is often little or no equity left in the home. Because of this, there is little reason for the borrower’s heirs to sell the home, and the lender is left to foreclose.

However, if there is equity, it pays for the heirs to try to sell the home themselves.

Whether a reverse mortgage makes sense for you will depend on your situation. It might make sense if you have an existing mortgage and no longer want to make monthly payments or if you have a use for the money now.

However, if you own your home without a mortgage and have enough money to meet your expenses, you will give away your home’s equity without a good reason to do so.

You should speak to an estate planning professional to determine your best options.