Using Reverse Mortgages to Pay for Long Term Care at Home or Away
A reverse mortgage is a loan that seniors take against their home’s equity. The lending bank makes payments in a single lump sum, in monthly installments, or as a line of credit. The loan does not have to be paid back until the last borrower passes away, or moves from the home, or lives in a care facility for one full year. Most commonly, the loan is not paid back in increments but payments of any amount can be made at any time at the borrower’s discretion. Typically, the home is sold, ore refinanced by the heirs, and the lender is only paid back the amount borrowed plus the interest that accrued. The lender is not entitled to other fees and does not share in the appreciation. There are two distinct types of reverse mortgages and both are relevant to the elderly looking to pay for senior care or home modifications; the Home Equity Conversion Mortgage (HECM), and, for higher value homes, the HomeSafe Equity Conversion Mortgage. The HECM is insured by the United States Federal Government and is only accessible via a lender approved by the Federal Housing Administration (FHA).The HomeSafe is a proprietary loan in which the lender self-insures and is therefore at greater risk. Hence the interest rates are sometimes higher on the HomeSafe loan, which can provide funds of up to $3 million.
A Historical Note - The Department of Housing and Urban Development (HUD) regulates reverse mortgages and has done so since the inception of the HECM in 1989. Before HUD began insuring the now widely available and consumer friendly HECM, the former, pre-HECM Reverse Annuity Mortgages (RAM’s) were done as a tool to sell annuities and required the borrower to enter an equity sharing agreement. The now outdated RAM has not been offered in decades yet bad press about those old style reverse mortgages lingers and unfortunately taints the good image of the industry for homeowners who do not take the time to learn of the many important changes HUD has enacted. These changes include the financial assessment instituted in 2015 and the non-borrowing spouse (NBS) protections of the past decade.
Quick Facts for those Considering Reverse Mortgages
- Homeowners can never owe more than their home’s value. All future appreciation belongs to the estate, subject to paying off the loan, just like with a conventional loan.
- Borrowers have the right to remain in their home for life, or refinance to get more money later, or sell and move on at any time.
- Loans become due when the last borrower (both spouses can be on the loan) sells the home, moves out of the home, moves to assisted living or a nursing home for 12 consecutive months, or when both borrowers have passed away.
- Reverse mortgages do not affect one’s Medicare or Social Security benefits but can potentially impact Medicaid eligibility under certain circumstances. Speak to an elder attorney for more details.
- Reverse mortgages can be re-financed to get more cash when home values rise.
- Closing costs depend on the interest rate and loan type you select
- Between 40% -75% of the home’s value can be borrowed, based on age and equity
? There are no restrictions on how the money can be used.
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When Reverse Mortgages are Appropriate for Eldercare
Many seniors are in a situation where they do not have the income or savings to pay for personal care, for home modifications to enable aging in place, or for long term care insurance. However, they do have financial resources tied up in their home ownership. For some of these seniors, a reverse mortgage is a good option. That said, every family’s situation is unique, and in some cases, a reverse mortgage is not the best option. Follows is an exploration of varying scenarios and why different families might opt for or against the use of a reverse mortgage. Single Seniors in Fair Health Reverse mortgages are a good option, as the elderly individual does not require immediate care. Many seniors in this situation will continue to live independently in their home for some years, and they can use the proceeds from a reverse mortgage to purchase long term care insurance and / or make modifications to their home. This, in turn, makes the home safer and more accessible, which can prolong or allow them to age at home indefinitely. Single Seniors in Need of Care If the family can provide sufficient care to enable the individual to remain living in their home or the proceeds from a reverse mortgage can pay for in-home care or adult day care, then a reverse mortgage is a viable option. However, once the last remaining borrower has been in a care home for 12 consecutive months without returning home at all, the loan will become due and the borrower or their heirs will want to refinance the home if it is t be rented, or sell the home to pay for the care home. Married Seniors in Fair Health Reverse mortgages are a good option when neither senior requires immediate care, or at least one of the spouses will be living in their home for some years. Couples in this situation will often use the proceeds to purchase long term care insurance or make home accessibility modifications in anticipation of a future disability. Some individuals are concerned that if they live in the home for many years and continue to borrow against the home’s value, their loan may exceed the value of the home. This is an unwarranted concern because the government assumes this risk and seniors will never owe more than their home’s value. Married Seniors with One Spouse in Need of Care A common reason that seniors seek reverse mortgages is when one spouse of a married couple requires care. A spouse in poor health may be required to move into a skilled nursing or assisted living community, and the family requires resources to pay for that care. Couples include both partners on the reverse mortgage agreement. Should the spouse receiving care pass away, the remaining spouse can continue to live in the home with no monthly repayment. Should the spouse in the home die first, the loan is then due, and the remaining resources from the home refinance or sale can pay for the surviving senior’s ongoing care. Married Seniors with Both Spouses in Need of Care Reverse mortgages are the best option for married couples when both spouses require care if they do not want to move to an assisted living environment. If both borrowers need to move from the home and enter assisted living or skilled nursing communities in the near future, the loan will need to be refinanced in order to rent the home, or the home will most likely need to be sold so they can pay for the qualify of care they desire. Reverse mortgages become due when the last borrower moves from the home or passes away. Oftentimes the proceeds from a reverse mortgage can be used to pay for in-home care that enables the senior(s) to continue living safely and comfortably at home. During these times of heightened awareness of the spread of disease, this is a welcome choice for elders and their family members.
Paying Family Members for Care with a Reverse Mortgage
Using a reverse mortgage to pay a family member to care for an elderly loved one may seem like an odd idea. At first blush, it can look as though the paid caregiver is taking advantage of the care recipient/homeowner by receiving payment for care they would have otherwise provided free of charge. However, upon closer examination there are several good reasons to take this approach. Consider the situation where a family member cannot hold a normal job because they are providing care. If no other financial assistance programs are available, it may be exceedingly difficult for the caregiver to make a living while providing care. It is fair and just for that family member to receive compensation. Another scenario common with individuals with dementia is when the care recipient does not accept other caregivers, or when the elder provides less behavioral challenges when they are looked after by a family member rather than an unfamiliar home care worker. Planning for future Medicaid eligibility is another common and strategic reason for paying family members as caregivers. Doing so can help to keep some of a home's value within the family. Consider the situation where it is clear that the elderly individual will eventually require nursing home care. Nursing homes are very expensive and most families rely on Medicaid to cover that cost. However, to be eligible for Medicaid, one cannot own a home, but not live in it. So if one moves to a nursing home (and no spouse remains at home), they are required to sell their home. The funds from selling the home will need to be spent on their nursing home care until it is exhausted, and then Medicaid will take over payments for care. Now consider if a reverse mortgage has been taken out on the home and that money was used to pay a family member to provide care. When the elderly homeowner moves to a Medicaid funded nursing home, they are required to sell the home. The bank is then re-paid for the reverse mortgage, the family caregiver keeps the money they have been paid, and the elderly individual is more immediately eligible for Medicaid. The above approach is complicated, and Medicaid is thorough in their eligibility assessments. Therefore, it is strongly recommended the caregiver and care recipient create a formal personal care contract to best prepare for future Medicaid eligibility. One might also find it helpful to seek the counsel of a professional Medicaid planner. Learn more here.
Reverse Mortgages Impact on Other Government Benefits
Reverse mortgage payments are not counted as income if they are spent on care in the same month as they are received.
As most elderly persons receive multiple benefits from the federal government, one should not consider a reverse mortgage independent of its impact on other benefits. Fortunately, the most common benefits, including Medicare and Social Security, are not impacted in any way by a reverse mortgage. However, Supplemental Security Income, Medicaid, and Veterans' Pension eligibility may be affected. These vary state-by-state, but generally speaking reverse mortgage payments are not counted as income, as long as they are spent in the same month as they are received. However, if the funds are allowed to accumulate month over month, they could push one’s resources over the allowable limits.
Eligibility Requirements for Reverse Mortgages
- Age - Seniors must be at least 62 years old to qualify; there are no upper age limits. Some exceptions can be made for homeowners age 60 and over. Also, non-borrowing (NBS) spouses can be as young as age 18.
- As seniors age, they become eligible for higher loan amounts. The age of the younger spouse will be used to calculate the loan amount.
- Low interest rates have a bigger impact on loan amounts than does age.
- Health - There are no requirements or restrictions for getting a reverse mortgage related to the applicant's health or disability status. That said, single seniors with disabilities that may require them to move from their home in the very near future, i.e. within 12 months, might want to consider options other than a reverse mortgage.
- Marital Status - Widowed, married, single, or divorced does not play a direct role in eligibility.
- Finances –applicant's income or financial resources are considered as eligibility factors. Since borrowers are not making monthly repayments, the financial assessment's goal is to ensure the homeowner is financially capable of maintaining their home, paying their property taxes and insurance, and has a history of paying their bills. Candidates on less solid financial footing may be allowed to set aside a certain amount of money from the loan proceeds to cover these costs. This is called a Life Expectancy Set Aside (LESA).
- Place of Residence - The geographic location of the applicant (their county of residence) is not a factor in eligibility. However, it does play a role in determining the maximum allowable loan amount. Persons residing in homes with higher home values are eligible for higher loan amounts.
- The home must be the senior’s primary residence; a borrower can live outside the home, for example in a nursing home or in assisted living for up to 12 months before the reverse mortgage becomes due and payable.
- A reverse mortgage has to be the primary debt against the house. However, having an existing mortgage does not prevent one from getting a reverse mortgage. It is very common to use some of the proceeds of a reverse mortgage to pay off an existing mortgage.
- Homes of any value can qualify but there are limits on how much can be borrowed.
- The property must be a single-family home, or a 2-4 unit home with one unit occupied by the borrower, or a HUD-approved, or lender-approved, condominium or a FHA approved manufactured home.
Reverse Mortgage Benefits, Payouts and Restrictions
Reverse mortgage benefits are very flexible and can be paid in the methods described below or a combination of those methods.
- Lump Sum Payment – This is typically used to pay off a conventional mortgage to eliminate monthly payments and increase cash flow, or to make a major purchase such as retro-fitting a home to improve its accessibility for the elderly. Medicaid, VA Pension, and SSI recipients should investigate how a lump sum payment might affect their eligibility.
- Monthly Payments – A senior can receive guaranteed monthly payments for a set period of time (term option) or for as long as the home is their primary residence (tenure option). They can changes how they receive funds at any time during the loan term, as their needs change.
- Line of Credit – This allows the senior to decide when they need the money and how much to borrow. Interest is only charged on the balance due, not on the creditline.
- Modified Combination – A senior can opt to receive a line of credit, as well as monthly payments for the duration the home is their primary residence, or for a set period of time, or any combination of the above.
There are no restrictions on how the proceeds from a reverse mortgage can be used.
Reverse mortgage proceeds are commonly used to pay for home care, assisted living / nursing home care (for one spouse), home modifications to allow aging in place, and even to purchase long term care insurance. A very general rule of thumb is that seniors can borrow a maximum of approximately 75% of their home’s value. The Federal Housing Authority sets the maximum borrowing amount and updates these amounts annually. Other factors that determine how much seniors can borrow include their age, interest rates, and equity owned. The older the homeowner, the higher value the home, and the more home equity the senior has, the greater the amount they can borrow.
What to Expect
Reverse mortgages typically take 4-8 weeks to process. Before a reverse mortgage application can be processed, the government requires borrowers, or their guardian, to speak with an approved reverse mortgage counselor. There is a small charge for this session which is offered by various non-profit and credit counseling agencies. It is very helpful for individuals to fully understand the benefits and limitations of a reverse mortgage from an individual who will review a checklist of facts to ensure the borrower has been fully informed. Your Home Equity Retirement Specialist can provide this list of counselors, and a complimentary loan comparison for you upon request (link this to www.MaryJoLafaye.com
How to Apply
There are two steps that persons interested in reverse mortgages must undertake prior to receiving benefits. 1) Contact an experienced reverse mortgage lender to request a full loan proposal and see if you qualify. 2) Call to schedule your HECM or HomeSafe counseling session from the list of approved counselors provided in your loan proposal.
Costs of Reverse Mortgages
The costs of reverse mortgages are varied depending on which loan program and interest rate you choose. Reverse mortgage lenders are required to provide borrowers a complete breakdown of costs in a document known as a GFE. This can be used to compare costs from different providers. The following cost information varies from year to year, but the fee categories remain relatively consistent. Typically, all of the fees associated with a reverse mortgage are added to the loan balance with the exception of the counseling session and appraisal inspection.
- FOR HECM ONLY: Mortgage Insurance Premium (MIP) – both initially and annually. The initial MIP is 2% of the home’s value. The annual premium is .5% of the loan balance.
- Home Appraisal Fee - usually ranges from $500-$800.
- Other Fees - small fees, such as those for document preparation, credit reporting, flood certification, title and escrow, flood certification, credit report, etc.