Reverse Mortgages

Reverse mortgages are United States Government-approved programs that allow seniors to use the equity in their homes while they are alive. The senior borrows against the equity in the home with the understanding that the house will need to be sold at fair market value to pay off the loan when he dies. The homeowner can draw on the equity via a monthly payment or in a lump sum. A reverse mortgage benefits the homeowner in that, if the house is worth less than the loan amount at the time he dies, the bank can’t charge his estate for the difference. However, if his children want to keep the home at the time of his death, they’ll have to pay the full loan amount regardless of the home’s value.

Reverse mortgages are an excellent way for seniors who are “house poor” to be able to increase their monthly income for whatever purpose they choose. The proceeds of a reverse mortgage can be used for any purpose: to pay off an existing loan, make improvements on a home, or to use as an additional source of income. For those seniors who haven’t been able to take many vacations, they can do so if they take out a reverse mortgage. It can also be an excellent financial tool to allow a senior to remain in his home as he ages by providing him with the financial ability to hire in-home caregivers. This is called Aging-In-Place

Many reverse mortgages that were taken during the real estate boom are now severely underwater, but because the US Government guarantees reverse mortgages, the monthly income for these seniors cannot be decreased nor will there be extra costs to their estates at the time the seniors die. There are generally higher up-front costs and fees, typically $6,000 to $10,000 for your average reverse mortgage, and the amount borrowed is typically 50% to 75% of the home’s value depending upon a formula developed by the US Department of Housing and Urban Development. The formula takes many factors into account, including the value of the home and the senior’s projected lifespan,

Although the proceeds from reverse mortgages aren’t taxable, these monies are countable income when applying for Medicaid. If the proceeds were paid out in a lump sum, the amount could keep the senior from qualifying for help to pay for nursing home placement for several years. Monies paid out on a monthly basis increase the senior’s income and could possibly render them ineligible for Medicaid as well. Because most mortgage brokers don’t consider Medicaid when assisting a senior with a mortgage of any type, this issue is rarely addressed.

Reverse mortgages are valuable tools to allow seniors to improve their lifestyle – but if the possibility exists that a senior will be entering a nursing home within the next five years it would best serve the senior to discuss the issue with an elder law attorney so that the proceeds won’t affect Medicaid eligibility. Even if the senior enters a nursing home on a short-term basis, if he isn’t able to pay the co-pay for Medicare and there is no supplemental insurance to help offset the costs, the senior might end up owing thousands of dollars out of pocket to a nursing home or hospital if he doesn’t qualify for Medicaid.

Reverse mortgages can be an excellent way to increase the senior’s income, but by borrowing against the home the family won’t be able to keep it after the senior dies unless they pay the full cost of the mortgage (not the home’s value) at the time of his death. This can be distressing for family members who feel that the family home should be kept in the family. The best thing to do is discuss a reverse mortgage with a financial advisor if at all possible.