How Reverse Mortgages Affect Medicaid

21 Comments

Many seniors are pitched the benefits of a reverse mortgage as a way to "unlock" the equity in their homes and pay for a better lifestyle. Does this make sense? In what circumstances? What if one spouse needs to move into a nursing home? Let's take a look…

With a conventional mortgage, you borrow a lump sum of money from a bank or mortgage company and each month you partially repay the loan. Thus, you must set aside cash flow every month to make sure you can make that payment. If you fall behind, you may find your house being foreclosed on by the bank.

With a reverse mortgage, however, you receive a check each month from the bank or mortgage company, and you never have to pay them back as long as you live in the house. If the loan is made to a married couple, then no repayment need be made until neither spouse is living in the home.

At that time, the loan is repaid, plus interest. If the family members cannot pay the loan off, the house will be sold. Note, however, that if the amount of the loan exceeds the net proceeds from the sale of the house, the bank is simply out of luck—it cannot come after the family members for the shortfall.

Thus, a reverse mortgage may make sense for you if:

  • You find yourself short of cash each month;
  • You would like to make lifetime gifts to your children or grandchildren and don't have the cash to do so;
  • You would like to have medical treatment not covered by Medicare or your health plan;
  • You would love to go on an extended vacation;
  • Your spouse must move into assisted living; or
  • You like the idea of drawing down some of the equity in your house without having to repay the loan during your lifetime, so long as you are living in your house.

The amount you can borrow depends on your age, the value of your house, and the current interest rate. The older you are, the more you can borrow, since your life expectancy is shorter and the bank won't have to wait as long to get repaid. Also, as interest rates rise, the amount you can borrow decreases.

However, it rarely makes sense for a single person who may soon need nursing home care to obtain a reverse mortgage, because as soon as they move out of the house, the loan will have to be repaid. That will cause the house to be sold, exposing the cash that had been protected by the home exemption. Then you have to figure out what to do with that cash so that the person qualifies for Medicaid!

If one spouse is in the nursing home and the other spouse remains at home, a reverse mortgage could indeed give additional income to the healthy spouse. In this case, the monthly payments are not actually counted as income under the Medicaid rules, which is good, since that could allow some of the nursing home spouse's income to be shifted over to the healthy spouse.

No decision about obtaining a reverse mortgage should be made without a consultation with a knowledgeable reverse mortgage specialist or financial planner. It's also a good idea to check with an elder law attorney before you sign on the dotted line, to make sure the plan still makes sense if you and/or your spouse will need nursing home care in the not too distant future.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

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21 Comments

Sound advice - but please note that you can also have access to a line of credit that grows about 4% a year as well. You do not have to opt for the monthly disbursement only, and disbursements can be for perpetuity or for a set term as well.
I have a problem with suggesting that one use a reverse mortgage to "take an extended vacation" unless one has long term care insurance. As only about 10% of people actually have a good policy of this insurance, the home may be the only protection against being forced to go to a nursing home rather than home care or assisted living. I have worked in nursing homes as an RN and I've sued them as a lawyer for neglect of elders. I don't recommend that one plan to go into a nursing home as a financial strategy. Lots of people are being steered the wrong way about reverse mortgages. I believe, as The Consumer's Union does, that they are an absolute last resort. If one can use family loans, a line of equity or any other plan to finance care, may be a lot better than picking a nursing home.
Carolyn Rosenblatt, RN, Attorney, Mediator, AgingParents.com
isn't - Google an article from the New York Times, October 14, 2012 by Jessica Silver Greenberg: “Reverse Mortgages Costing American Their Homes”
read the comments too, lots of personal stories - some positive but most not.

Another article on RM is from the National Consumer Law Center, called “Subprime Revisted: How RM Lenders Put Older Homeovers” Equity at Risk”

You have to be very careful. Personally I think RM work best for the young old....like the couple who is 65 & 68 and have a 300K home in a stable and aspiring neighborhood and in good health and in theory have another decade or two in the home so that the value of the home will increase so that the RM is a win-win.The amount of $$ you can get will depend on the appraisal of the home, so if the home is of low-value, then you actually do not get all that much $$. I think it's about 50% on the FHA backed RM's. I looked into RM on my mom years & years ago, but her home is tough on comps as it's in historic zone and is much smaller (150-180K) than the others around her (400-600K) and has foundation issues so never any FHA loans buyers (just cash or conventional) so it would not work for her property wise and then would be a cluster to deal with for Medicaid.

Also I'd do a full listing of all the costs on the home for that past 3 years to see what you are looking at & then look at the majors in the house (roof, AC, heat, water heater) and if any of those will need replacement in the near future. If alot of the RM $ has to get spent on the home, then it might not be worth doing. Then I'd call a Realtor to say Dad is thinking about selling and see what they have sold in the last 6 months that are comperable and the DOM (days on market). It will give you an idea of what you would be up against if you had to do a sudden sale.