7. How important is the goal of leaving a bequest?
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Studies show that a large proportion (as high as 80%) of senior homeowners wish to leave a bequest to their children. For most seniors, home equity represents more than half of their net worth. A reverse mortgage - which uses up equity - is viewed as running counter to the bequest motive.
The adult children of seniors (the heirs) in many cases see the issue differently. Often these children would prefer their parents use their equity stake to adequately take care of themselves rather than scrimp through retirement for the sake of preserving an estate.
Clearly this is a matter of personal and family values and probably best handled through open discussion between the parents and children. There is no right or wrong answer, but open consideration of the issue will help in the assessment of whether a reverse mortgage is right for you.
Taking on a reverse mortgage does not preclude the possibility of leaving an inheritance. It does, however, set in motion the process of spending down accumulated home equity. Whether or not there is equity remaining for a bequest is a function of how large the accumulated reverse mortgage grows (including interest accumulation) and how much growth occurs in the market value of the home.
When a reverse mortgage holder dies, the heirs will be responsible for paying off any remaining debts - including the reverse mortgage. Typically this is done by selling the home and applying the sales proceeds to the reverse mortgage debt:
- If the home sells for less than the accumulated reverse mortgage balance, all proceeds go to pay the debt and there is nothing more to pay. A reverse mortgage will never cost more than the value of the home.
- If the home sells for more than the accumulated reverse mortgage balance, the additional equity not used to retire the debt belongs to the estate.
Article Series - tutorial
- Is a Reverse Mortgage Right for Me? New Guide Available
- 1. Am I the Right Age for a Reverse Mortgage?
- 2. How long do I expect to stay in my home?
- 3. How long do I expect to live?
- 4. How much additional income do I need?
- 5. How much equity do I have and how much can I borrow?
- 6. Have I considered other options to reverse mortgages?
- 7. How important is the goal of leaving a bequest?
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