While we’re not true fans of reverse mortgages, there are unique situations where we have seen them work for some seniors. Generally, we feel they work best when used to supplement cash flow. However, when seniors are in a position to consider a reverse mortgage, they should be fully aware how it may affect long-term care, should they need it.
First, let’s refresh on reverse mortgages. Only available to seniors age 62 and older, the most common reverse mortgage is a Federal Housing Authority-insured Home Equity Conversion Mortgage (HECM). Basically, the homeowner takes out a loan against the value of the home. The amount generally depends on the borrower’s age, a current interest rate and the value of the home. The proceeds of the loan are used to pay off any existing mortgage and the remainder can be taken in a lump sum, a line of credit, monthly payments or any combination of these. The homeowner is responsible for the maintenance, insurance and taxes on the home. When the homeowner leaves the home, the house is sold to pay off the loan and the interest. If the house sells for more than the amount owed, the heirs receive the balance. If the loan balance is more than the home’s value, the bank takes the proceeds as partial repayment. The balance of the loan does not have to be repaid by the estate or heirs.
Reverse mortgages are hardly a deal that is too good to be true. The drawbacks include higher interest rates than traditional mortgages, FHA required mortgage insurance and the possibility you may exhaust the proceeds quicker than anticipated and have no collateral for another loan in the future. While not as bad as they once were, we generally recommend homeowners consider other alternatives first before entering into a reverse mortgage.
Homeowners with reverse mortgages are allowed to stay in the home until they die or choose to move. Because of this stipulation, those entering into a reverse mortgage should pay close attention to the possible need for long-term care. Proceeds from a reverse mortgage can be used to buy long-term care insurance, pay for long-term care facilities, or pay for in-home care or modifications that allows the seniors to stay in their home. Generally, if you enter a nursing home, your co-borrower is allowed to stay in the home until he or she dies or also needs to move into a nursing home or assisted living facility. Once the last homeowner on the loan is out of the home for more than a year, the loan comes due. Any stay in a long-term care facility for more than 12 months is considered a permanent move. Family members in the home but not on the reverse mortgage would be required to move.
A reverse mortgage can also affect Medicaid eligibility. Medicaid is a state-administered social welfare program designed to pay for long-term care once an individual’s assets are depleted. When applying for Medicaid, the state conducts a “look back” to ensure you or your spouse didn’t give away assets so you could qualify for Medicaid. If you took a lump sum from a reverse mortgage, you may have to use those available funds before qualifying for Medicaid assistance. Lines of credit or monthly payments may pose a conflict unless funds are being accessed and used within the month they are received, thus avoiding a build-up of assets.
The rules can be complicated; therefore, if you are in this situation, you may want to consult an elder care attorney to fully understand your options. If you are only considering a reverse mortgage, you should consult a trusted financial adviser to explore all of your options before you make a decision.
If you have questions regarding how a reverse mortgage may affect your elder care options, the experts at Henssler Financial will be glad to help: