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Reverse mortgages can mean reversal of fortune for heirs, p. 2

Discussing reverse mortgages reminds us somehow of Jessica Rabbit, the impossibly sultry wife of the title character in "Who Framed Roger Rabbit?." At one point in the movie, she tells a detective, "I'm not bad. I'm just drawn that way."

On the surface, a reverse mortgage offers a senior easy income by cashing in on his home equity. In practice, however, a reverse mortgage may make life for the senior easier but leave his heirs with a lot of debt.

In a perfect (and simple) world, a reverse mortgage would play out like this: A man turns 62 and realizes that he has not saved enough to make ends meet. He still lives in the house he bought 40 years ago, and, even after refinancing a couple of times, the mortgage is nearly paid off. The house is his most valuable asset -- if not his only asset -- and he plans to leave it to his nephew. He does not want to sell the house, but he needs money.

His banker persuades him to take out a reverse mortgage. As we explained in our last post, the lender gives the homeowner a percentage of his equity, and the homeowner choses one of several payment plans. The loan comes due when he moves, sells or dies.

This way, the homeowner not only has the extra cash, but he is free of his monthly mortgage payment. Importantly, he still owns his home, so he can still leave it to his nephew.

Say our homeowner dies 10 years after he signs up for the reverse mortgage. His nephew inherits his small estate, including the house -- and the reverse mortgage. The loan comes due on the homeowner's death, and now the nephew has a dilemma: The only way he can pay off the loan is to sell the house. And his uncle had done everything he could to hold onto the house so his nephew could have it when he died.

Researchers have found that lenders are not exactly patient while heirs sort out the details. Families report that lenders are demanding payment and even foreclosing on the home just weeks after the borrower's death. In some cases, heirs are battling with lenders just to get the details of the loan.

If that doesn't seem right, it isn't.

We'll explain in our next post.

Source: The New York Times, "Pitfalls of Reverse Mortgages May Pass to Borrower's Heirs," Jessica Silver-Greenberg, March 26, 2014

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