After consulting in Little Rock for a long time, one of the first concerns that people considering a reverse mortgage often express is whether they will have anything left to pass on to their children. A recent client mentioned that they had been trying to keep their home to share equally among their three children, but when their living expenses became tight, they spent several nights contemplating this decision.

Looking at the numbers, the average home value in Little Rock, according to Zillow, is $222,779, which has increased by 3.4% over the past year. This means that households that have been paying off their mortgage for a long time likely have significant equity built up. Particularly, if a household has fully paid off a 30-year mortgage and now owns their home free and clear, the entire value of the home is essentially their equity. A reverse mortgage allows homeowners aged 62 and older to use this equity as collateral, receiving funds from the lender in a lump sum, monthly payments, or a line of credit instead of making monthly payments. Repayment occurs when the home is sold, the owner passes away, or the home is no longer used as the primary residence.

The concern about leaving assets to children arises because, as funds are drawn from a reverse mortgage, the loan principal and interest accumulate, which reduces the homeowner's equity over time. This means that the net assets left to heirs could actually decrease, which is not a trivial matter. Especially if a large lump sum is taken or if the homeowner lives a long time, the reduction in equity could be more significant due to compounding interest. However, since it is a non-recourse loan, even if the home value falls below the loan balance in the future, thanks to FHA insurance, heirs are not required to pay the excess amount, which serves as a minimal safety net.

Let's also look at the tax aspect. The effective property tax rate in Little Rock is around 1.13%, which is higher than the state median of 0.81%. Receiving a reverse mortgage does not eliminate the obligation to pay property taxes; in fact, borrowers must demonstrate their financial ability to continue paying these taxes and homeowners insurance to get the loan approved. Beyond concerns about leaving assets to children, securing cash flow to continue paying these taxes is the first hurdle for loan approval. If taxes or insurance payments cannot be maintained afterward, it could lead to default, which is something to keep in mind.

From a cost perspective, it should be noted that the initial burden is generally higher than a standard mortgage when factoring in origination fees, mortgage insurance, and closing costs. If you want to preserve as much of the asset as possible for your children, you might consider discussing with a counselor the option of opening a line of credit instead of a reverse mortgage, allowing for gradual withdrawals as needed to slow the rate of equity reduction.

Understanding how property taxes are calculated can also be helpful. Pulaski County uses 20% of the assessed value as the taxable base and multiplies it by the millage rate to determine the tax amount. Within Little Rock, the median tax amount can vary from $543 to $4,189 depending on the zip code due to school district budgets and special district assessments. Therefore, when estimating the net assets to leave to children each year, it is practical to factor in these regional tax variations.

As of 2024, 18.2% of Arkansas's population is over 65, indicating that more households will likely face similar concerns in the future. Since this is a balancing act between leaving assets to children and ensuring one's current financial stability, it is difficult to declare one side as the definitive answer. It is essential to go through the mandatory counseling with a HUD-approved counseling agency before applying and to discuss this decision with family members. This article is not investment or legal advice, and it is recommended to consult with professionals before making any actual contracts.