Reverse Mortgages (Home Equity Conversion Mortgages) have become a popular and well respected way for seniors to access the equity in their homes for many reasons. Some use the equity for long-term care needs, to pay bills, pay off existing mortgages or debt, pay for prescription drug costs, home improvements, home modifications, or to simply be able to enjoy life a little more by traveling and enhancing their retirement cash flow. Many seniors use reverse mortgages to pay high property tax bills, and have even been saved from foreclosure and bankruptcy because they applied for a reverse mortgage.
Other seniors use reverse mortgage proceeds to fund advanced estate planning techniques. This includes increasing the value of their estate through life insurance purchases, planning ahead for future long-term care needs, assisting grandchildren with college funding, making charitable donations, and to convert IRA funds to Roth IRA funds, just to name a few.
Many newspaper, TV, radio and internet articles circulating in the media give inaccurate and misleading information about reverse mortgages. So called “experts” who are interviewed for quotes often have no involvement in the mortgage industry and do not understand the federal law that regulates these loans.
Each consumer should make it his or her own responsibility to talk with an expert, and educate themselves on the facts.
TIP: As you know, the media attract more viewers, readers, and listeners when they make a story exciting, scary, or dramatic. Because reverse mortgages are federally regulated loans, there really isn’t anything scary or dramatic about them when you know the facts. Be wary of interviews and articles that make reverse mortgages seem like a scam. The Department of Housing and Urban Development has done an excellent job of regulating reverse mortgages, and they are designed to help seniors, not hurt them.
Some good websites for more information are http://www.fanniemae.com – be sure to download “Money from Home” for free. The National Reverse Mortgage Lenders Association has great consumer booklets- http://www.reversemortgage.org .
The National Council on Aging recently did a study that concluded that reverse mortgages are good sources of funds for long-term care planning and long-term care needs. You can download the entire study by visiting http://www.ncoa.org
Although there are closing costs associated with these loans, most, if not all of them are factored in to the loan, and are not out-of-pocket expenses for the senior. Whether or not a reverse mortgage is right for a senior depends on their specific situation, case design, and cash flow or estate planning needs.
What is a Reverse Mortgage?
A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
Who Qualifies for a Reverse Mortgage?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, co-ops are not allowed. Only the Financial Freedom “Cash Account” program is available on co-ops in New York City. As long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. There are no special income, credit or medical requirements.
How Are Seniors Protected?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure your family member understands the program, and review alternative options, before they apply for a reverse mortgage.
You can seek counseling from a local HUD-approved counseling agency, or a national counseling agency, such as AARP (800-209-8085), National Foundation for Credit Counseling (866-698-6322), and Money Management International (877-908-2227). Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone.
By law, a counselor must review (i) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives; (ii) other home equity conversion options that are or may become available to the prospective borrower, such as property tax deferral programs; (iii) the financial implications of entering into a reverse mortgage; and, (iv) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.
TIP: HUD Counselors are not financial planners, and should not be giving advice on financial product purchases. Talk to a trusted advisor about a plan for the reverse mortgage proceeds.
How Can the Cash Flow From a Reverse Mortgage Keep Mom and Dad at Home Longer?
The cash flow from a reverse mortgage can be used for any purpose. In order to keep seniors safe and at home for longer periods of time, it is recommended that the cash flow be used for home modifications, repairs, personal emergency response systems, and in-home care services.
Whose Name Remains on The Title to the Home?
The seniors’ names remain on the title to the home. The bank is not in the business of taking over title, and certainly not in the business of owning homes. Therefore, just as with a traditional mortgage, the seniors’ name is on the title to the house.
Can Their Home Be Taken Away from Them?
When a senior implements a reverse mortgage, it is important to remember that they are responsible for keeping the home owner’s insurance in force, paying annual property taxes, and for general upkeep of the home. Unless one of these criteria is not met, their home can never be taken away from them.
Will Heirs Be Responsible for Repaying This Loan?
No, a reverse mortgage is a “non-recourse” loan. This means that the lender is only entitled to loan repayment via the sale of the home for fair market value. If there is any remaining equity over and above the final loan amount, the heirs receive that remaining equity. If the home sells for LESS than the final loan amount, the federal government steps in and pays the lender the difference. Heirs’ assets are never at risk.
When Does the Loan Come Due?
The loan comes due when the last remaining homeowner leaves the home permanently. This means that the loan will come due when the last homeowner passes away, sells the home, or leaves permanently (12 months or more).
Do Reverse Mortgages Affect Medicare or Social Security?
Reverse Mortgages do not affect Medicare (including Medicare Part D) or social security income. However, the proceeds from a reverse mortgage CAN affect local income based programs in your area, and the big one- Medicaid. (note there is a huge difference between MediCARE and MediCAID.) Medicaid eligibility can be preserved with the right plan even after taking out a reverse mortgage. Talk to a professional about the options.
Can Mom and Dad Still Leave Their Home To Their Children?
Yes, with proper planning, they certainly can. One way to make sure that heirs receive the value of the home is for the seniors to purchase life insurance using the proceeds from the reverse mortgage. Some seniors end up doubling or tripling the value of their estate for their heirs because they use the reverse mortgage proceeds to pay the life insurance premiums. This way they never have to touch a penny of their savings, investments, or current income to increase the value of their own estate. This also helps the heirs, because inheritance passed on through life insurance (beneficiary designation) bypasses probate, and taxes!
How Does The Deficit Reduction Act 2005 Effect Home Equity?
The Deficit Reduction Act of 2005 requires that individuals with home equity over $500,000 ($750,000 in some states) use some of that equity to pay for their own care prior to qualifying for Medicaid services. Reverse mortgages have become a very popular and appropriate option for decreasing the equity in the home and using that equity to pay for care.
For more information or to contact the author visit http://www.theltcexpert.com