When it comes to helping an aging loved one with financial decisions, especially those that impact long-term care planning, family caregivers should make sure they take the time to understand all aspects of a transaction. One option for seniors that is becoming increasingly popular is to use the equity from their homes to increase their cash flow. Some elders need to pay off old home equity loans, while others may have credit card debt that they would like to eliminate. Perhaps an elderly parent needs additional income to pay for in-home care, or they just need the money to cover their daily living expenses. Regardless of the reason, a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a big decision that should be considered carefully.
Are Reverse Mortgages Good for Seniors?
Reverse mortgages have received a lot of press in recent years. Of course, there are pros and cons to using this option, and it may not be appropriate for everyone. Interestingly enough, two large organizations advocate their use, especially for seniors who need help funding their plans to age in place.
A study released by the National Council on Aging (NCOA) shows that 13.2 million Americans are candidates for reverse mortgages to pay for long-term care expenses at home, allowing many to remain independent and live in their homes longer. The Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages to Pay for Long-Term Care report funded by the Centers for Medicare and Medicaid Services (CMS) and the Robert Wood Johnson Foundation concluded that reverse mortgages can alleviate financial pressure not only for individuals and families, but also for state Medicaid programs and the federal government.
Reverse Mortgage Pros and Cons
While a reverse mortgage may seem like a straightforward tool for tapping a portion of one’s home equity and increasing income in retirement, there are certain benefits and drawbacks to using one.
Benefits of Reverse Mortgages
Home Equity Conversion Mortgages (HECMs) are the only reverse mortgages backed and regulated by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). Seniors age 62 and older are eligible to use this federal program to procure a “non-recourse loan,” which means that a homeowner’s heirs are not responsible for repayment. Unlike a traditional mortgage, no monthly payments are required. In fact, this type of loan does not have to be repaid until the homeowner (or both homeowners, in the case of a couple) leave the residence permanently or pass away.
The money received from a reverse mortgage is tax free and does not interfere with Social Security retirement benefits or Medicare benefits. For senior homeowners who are having trouble making ends meet, this can be a lifesaver. Some use this supplemental income to pay for in-home care, adult day care, prescription drugs, credit card debt, and necessary home repairs or modifications so that they can age in place. Many seniors’ homes have been saved from foreclosure by using this method to pay past-due property taxes or current mortgages that have become unaffordable.
Prior to completing an application for a reverse mortgage, seniors are required to attend a HUD counseling session. This is designed to make sure the senior understands how the reverse mortgage works and give them an opportunity to get answers to any questions they may have. They speak with a trained counselor either over the phone or in person, and a certificate is sent to the senior after the counseling session is completed. This certificate must accompany their reverse mortgage application.
Disadvantages of Reverse Mortgages
If you are a caregiver for a senior who needs help at home, the proceeds from a reverse mortgage can be extremely helpful when it comes to covering the costs of in-home care. However, while reverse mortgage proceeds do not affect Medicare or Social Security retirement benefits, payments can affect eligibility for Medicaid and other need-based programs like Supplemental Security Income.
Long-term care Medicaid is a jointly funded state and federal program that assists impoverished seniors in paying for medical and long-term care. Anyone who applies for Medicaid must meet strict asset and income eligibility requirements before they are accepted into the program. If a senior elects to receive a large lump sum of cash from the equity in their home via a reverse mortgage, it can cause them to lose their eligibility for Medicaid services.
It is extremely important to consult an expert who understands the complicated Medicaid eligibility rules (they vary from state to state) to avoid problems down the road. An elder law attorney can be very helpful when considering how reverse mortgage proceeds might affect Medicaid planning.
Additionally, there are both upfront and ongoing costs associated with a reverse mortgage. Closing costs and other fees must be paid either up front or over time. Costs may be paid up front out of the proceeds of the loan, leaving very little in the way of any out-of-pocket costs for seniors, however these costs are added to the loan balance.
When considering a reverse mortgage, it is important that the senior is willing and able to stay in their home long term. Do you anticipate that the elderly homeowner will require an increased level of care in the near future? If they end up requiring long-term care in a nursing home or an assisted living facility, the loan will become due once their home is no longer their primary residence.
Common Myths About Reverse Mortgages
Myth: The bank will own the senior’s home.
Fact: Banks are not in the business of owning seniors’ homes. The homeowner’s name remains on the title and they retain ownership.
Myth: The bank can make an elderly person leave their home.
Fact: HECMs are regulated by the federal government and banks are not allowed to make seniors leave their homes. In fact, the lender is more interested in having the senior stay in their home for as long as possible. Seniors are merely responsible for continuing to pay their homeowners insurance premiums and property taxes and for keeping the home in good shape.
Myth: The heirs will be responsible for repaying the loan when the senior dies.
Fact: Heirs are never responsible for repaying these “non-recourse” loans. After the senior passes away, their estate has 30 days (extensions for up to one year are possible) to sell the home for fair market value. That sale price then repays the loan. If heirs are interested in keeping the home, then the loan must be paid using another source of funds. According to the Consumer Financial Protection Bureau (CFPB), “heirs will never have to pay more than the full loan balance or 95 percent of the home’s appraised value, whichever is less.”
Myth: Seniors must make payments on reverse mortgage loans.
Fact: No payment is ever due on a reverse mortgage until the last living homeowner permanently leaves the home. However, the loan may become due earlier than anticipated if the homeowner falls into default due to unpaid homeowner’s insurance premiums, unpaid property taxes or the home falling into disrepair.
Find an HECM Counselor or Lender
Reverse mortgages aren’t for everyone. However, the supplemental income generated from a reverse mortgage can help seniors live better and remain in their own homes longer. For more information, contact a reputable lender who can analyze your loved one’s needs and goals to help devise a financial strategy that will help them pay for their care. Visit HUD.gov to access a Lender List Search tool to find an FHA-approved HECM lender and a Counseling Agency Search tool to find HECM counseling near you.