When it comes to helping an aging loved one with financial decisions, caregivers want to 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 home 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 cash flow to pay for in-home care, or they just need the money to cover their daily living expenses. Regardless of the reason, a reverse mortgage (also known as a Home Equity Conversion Mortgage or HECM) is a big decision for that senior, their family members and their caregivers.
Reverse mortgages have received a lot of press in recent years. Of course there are pros and cons to using this option, but interestingly enough, two large organizations advocate their use, especially for seniors who need help paying for home-based long-term care.
A study released by the National Council on Aging (NCOA) shows that reverse mortgages can be used by over 13 million Americans to pay for long-term care expenses at home, allowing many to remain independent and 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 also shows how reverse mortgages can alleviate financial pressure, not only for individuals and families, but also for state Medicaid programs and the federal government.
While a reverse mortgage may seem like a straightforward tool for increasing one’s income, there are certain benefits and drawbacks to using one. Let’s take a closer look.
Pros of a Reverse Mortgage
Reverse mortgages are 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 or Medicare benefits. For those senior homeowners who are having trouble making ends meet, this can be a lifesaver. Some use this extra cash flow to pay for in-home care, adult day care, prescription drugs, credit card debt, and necessary home repairs or modifications so that they can live safely and more comfortably. Many seniors’ homes have been saved from foreclosure by using this method to pay past-due property taxes or to pay off 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 to 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.
Cons of a Reverse Mortgage
If you are a caregiver for an aging loved one who currently needs in-home care, the proceeds from a reverse mortgage can be extremely helpful when it comes to covering the costs of care. However, also consider that, although reverse mortgage proceeds do not affect Medicare or Social Security, the proceeds can affect Medicaid and other need-based programs.
Medicaid is a joint state and federal program that assists impoverished seniors in paying for healthcare costs and long-term care. Anyone who applies for Medicaid must meet asset and income eligibility requirements before they are accepted into the program. If a senior takes 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 talk to an expert who understands the complicated laws that exist in each state to avoid problems down the road. An elder law attorney can be very helpful when considering how reverse mortgage proceeds might affect Medicaid qualification.
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 paid up front may be paid 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 intends to stay in their home long term. Anticipate as best one can whether a senior will require an increased level of care in the near future. If the homeowner ends up requiring long-term care in a nursing home or an assisted living facility, the loan will become due.
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: Reverse mortgages are regulated by the federal government and banks are not allowed to make seniors leave their homes. The lender is more interested in having the senior stay in the home for as long as possible. Seniors are merely responsible for continuing to pay their homeowners’ insurance 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 one year to sell the home for fair market value. That sale price then repays the loan.
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.
Myth: Reverse mortgage proceeds are taxable and affect Social Security or Medicare.
Fact: Proceeds are not taxable and do not affect Social Security benefits or Medicare coverage. However, need-based programs like Supplemental Security Income (SSI) and Medicaid can be affected.
Reverse mortgages aren’t for everyone. However, it has been proven that in many cases the cash flow generated from a reverse mortgage will help seniors live better and remain in their own homes. 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.
Source: National Council on Aging, https://www.ncoa.org/economic-security/home-equity/reverse-mortgages/reverse-mortgage-facts/