By: Joan Reed Wilson
As part of our elder law and long-term care planning practice, we often recommend reverse mortgages to clients. And we are often met with resistance. One of the most common misconceptions about reserve mortgages is that if someone obtains a reverse mortgage, all hope of ever having any equity to pass to their children is lost.
The truth is that reverse mortgages are very similar to traditional mortgages or home equity lines of credit. When the house is sold, the lender only receives the balance of the mortgage due and the remaining equity passes to the owner of the home, whether it is the original borrower or the children of the borrower.
The benefits of reverse mortgages are plenty, which is the reason we often recommend them. Here are a few:
1.) A reverse mortgage allows someone is who over age 62 to tap into the equity of their home and there is NO requirement to make payments on the mortgage until after the borrower leaves the home. Reverse mortgages are only offered for people who are over aged 62. As long as the borrower is alive and living in the home, the lender does not require any payments to be made against the loan. The borrower has choices on how to use the equity. Some people need a set amount each month to make ends meet. They can choose to have a certain amount direct deposited into their account from the reverse mortgage. Some people just need to tap into the equity for big ticket items like taxes or long-term care expenses. For those needs, the borrower can structure the reverse mortgage like a home equity line of credit and only withdraw funds as needed. No matter how the borrower takes the funds, the lender does not require them to be paid back while the borrower is alive and living in the home, so the reverse mortgage does not increase the borrower’s expenses.
2.) Neither the borrower nor their family members are liable if the house sells for less than the mortgage. If when the house is sold, the value of the mortgage is more than the proceeds of the house sale, the lender cannot go after the borrower or their family for the shortfall. The loans are insurance through the federal government so any shortfall is not the obligation of the borrower of their family. The cost of this mortgage insurance does make reverse mortgage closing costs higher than traditional mortgages or home equity lines of credit; however, often retired clients do not meet the income eligibility for the traditional mortgages so reverse mortgages are the only way to obtain the equity in the home. There are different packages available for reverse mortgages and some of the closing costs are very reasonable.
3.) The reverse mortgage funds held in a segregated account are exempt from Medicaid spend-down rules. For Medicaid purposes, certain assets are exempt and do not need to be spent down to qualify for benefits like the CT Home Care Program for Elders, which pays for home care. Most bank accounts are not exempt and must be spent down, but an account that holds the proceeds of a reverse mortgage are exempt because they are associated with the home, which is an exempt asset.
4.) Reverse mortgage lines of credit grow over time. The amount that someone is allowed to borrow from a reverse mortgage is set by the borrower’s age and the value of the home. Each year, the amount grows. Some of our clients have been able to tap into the equity accumulated in their reverse mortgages to help fund a move to an assisted living community. Others can use the funds to pay for necessary home care so that they do not have to move to a nursing home. During the first year of a reverse mortgage, regulations set a strict limitation on the equity that a borrower can access. As such, we recommend that clients look into a reverse mortgage well before they need to access funds, to ensure that they get past the first year before they really need the funds. After the first year, the full equity is accessible and then will grow each year.
A reverse mortgage can be a great tool to compliment a long-term care plan that provides you the most flexibility in obtaining the care you want, where you want.