Using Reverse Mortgages to Pay for Long Term Senior Care

Definition	Qualifications	Costs
Pros & Cons	Benefit Types & Limits	How to Apply
Overview of Reverse Mortgages

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Definition:

A reverse mortgage is a loan that seniors take against their home’s equity. The lending bank makes payments to the senior either 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 (often couples will both sign) passes away or moves from the home for one full year. Most often, the loan is not paid back incrementally, but rather the home is sold and the lender is paid back the full loan amount plus interest. 

 

Prior to the financial crisis beginning in 2008, there were 3 types of reverse mortgages; Home Equity Conversion Mortgages (HECM), Fannie Mae Home Keeper® and Jumbo Reverse Mortgages. The Fannie Mae Home Keeper® was discontinued in Sep 2008. Jumbo Reverse Mortgages, for higher value homes, are becoming obsolete as well because the government has increased the limit on how much can be borrowed with a traditional or Home Equity Conversion Mortgage. In addition, due to the credit crisis, banks became less willing to lend. 

 

Previously HECM accounted for over 90% of reverse mortgages, since the financial crisis of 2008, that number is nearly 100%. HECM are issued by the federal government and have many important consumer protections. There are limits on the fees & interest rates and borrowers will never owe more than value of their home, even if their home value declines and borrowers cannot be forced from their home or made to sell.

 

Pros & Cons:

Many seniors are in a situation where they do not have a lot of income or savings to pay for long term care but do have financial resources tied up in their home ownership. For most of these seniors, a reverse mortgage is a very good option and is commonly used to generate the money required to pay for long term care.

Reverse Mortgages Quick Facts

• Home owners will never owe more than the home’s value.
• Lenders cannot force seniors out of their homes.
• Seniors qualify easily because credits scores and income are not considered.
• Reverse mortgages can be re-financed which means it is fine to get one in a down real estate market.
• Closing costs are high, 4%-8% of the loan amount.
• Generally speaking, 20% -60% of the home’s value can be borrowed.
• Loans are due when the last borrower (both spouses can be on the loan) sells the home, moves out of the home for 1 year or passes away.
• Reverse mortgages do not affect Medicare or Social Security benefits.
• There are no restrictions on how the money can be used.

Various Senior Family Scenarios
Every senior’s situation is different and in some cases a reverse mortgage is not the best option. Follows is an exploration of several situations and why different seniors might want or not want to use a reverse mortgage.

• Single Seniors in Fair Health
  Reverse mortgages are a good option as the senior does not require immediate care. Many seniors in this situation will live independently in their home for some years and can use the proceeds from a reverse mortgage to purchase long term care insurance and / or make modifications to their home so it is more accessible, which can further prolong their time living at home.
• Single Seniors in Need of Care
  If the family can provide the care that enables the senior 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, if care cannot be provided at home and the senior’s health requires them to move into assisted living or skilled nursing facilities in the near future, then a reverse mortgage might not be the best option. This is because reverse mortgages rules require that a home be sold if the owner lives outside the home for 12 continuous months. Selling or renting the home is a better option.
• Married Seniors in Fair Health
  Reverse mortgages are a good option as neither senior requires immediate care and at least one of the spouses will be living in their home for some years. Seniors in this situation will often use the proceeds to purchase long term care insurance or make modifications to make the home more accessible. 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
  This is a very common reason that seniors seek reverse mortgages. 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 will include both partners on the reverse mortgage agreement. Should the spouse receiving care pass away, the remaining spouse continues to live in the home. Should the spouse in the home die first, there is sufficient time for the home to be sold, the loan is then repaid and the remaining resources from the home sale can pay for the surviving senior’s ongoing care.
• Married Seniors with Both Spouses in Need of Care
  Reverse mortgages are not the best option since it is likely that both seniors will need to move from the home and enter assisted living or skilled nursing communities in the near future. Reverse mortgages become due when the last borrower moves from the home or passes away. Renting or selling the home may be a better option. However, if the proceeds from a reverse mortgage can be used to pay for in-home care that enables the seniors to continue living comfortably at home, then a reverse mortgage is still an option.

Reverse Mortgages and Medicare, Medicaid, Social Security & Supplemental Security Income
Reverse mortgages do not affect regular Social Security or Medicare benefits. Supplement Security Income and Medicaid eligibility may be affected. This varies state-by-state, but generally speaking reverse mortgage payments are not counted as income, if they are spent in the same month they are received. If the funds accumulate, they could push one’s resources over the allowable limits for Medicaid or SSI eligibility. 

If a senior is currently receiving Medicaid benefits, it is recommended they consult with Medicaid eligibility expert prior to making the reverse mortgage decision. 

Using Reverse Mortgages to Purchase Long Term Care Insurance
Seeking to motivate the purchase of long term care insurance, the federal government offers a waiver that can reduce the fees associated with a reverse mortgage considerably if all the proceeds are used to purchase a tax-qualified, long-term care insurance policy. The waiver applies to the upfront mortgage insurance premium required to take the loan which is typically 2%. Click here for more details about purchasing long term care insurance.

Alternatives to Reverse Mortgages
For those requiring financial resources for a short period of time, a HELOC or Home Equity Line of Credit might be a better option. For individuals whose family or friends would be willing to lend them the money necessary for their care, there exist private reverse mortgages or retirement mortgages where the home is used as security to the lender. This is often done with adult children whom are financially secure and will be inheriting the home.

Be Aware That:

Reverse mortgage salespersons are not financial planners or eldercare experts and they do not necessarily have a borrower’s best interest in mind. Be sure to seek objective advice when considering this option.

 

Reverse Mortgages are Also Known As:

-Home Equity Conversion Mortgage
-HUD reverse mortgages
-HECM loans
-HUD/FHA Home Equity Conversion Mortgage
-HUD-insured Home Equity Conversion Mortgage
-Equity release (in United Kingdom)
-Lifetime mortgage
-Reverse annuity mortgage
-FannieMae Home Keeper
-Jumbo Reverse Mortgages

Qualifications for Reverse Mortgages

Age Requirements

Seniors must be age 62 or older to qualify for a reverse mortgage. There are no upper age limits. As seniors age, they become eligible for higher loan amounts. If both spouses are on the loan, then both of their ages are considered.

 

Disabilities / Health Requirements

There are no disability requirements or restrictions for getting a reverse mortgage. That said, single seniors with disabilities so severe that they may be required to move from their home in the near future might want to consider other options than a reverse mortgage.

 

Family Status

A senior’s marital status (widowed, married, divorced) does not play a role in eligibility. Many married seniors will have both spouses as co-signers of the loan as a measure of security should one partner’s health require them to move from the home.

 

Financial Status Requirements

Reverse mortgages are secured against the home and insured by the Federal Government; therefore a senior’s current financial status has very little effect on their eligibility.

 

Veteran Status Requirements

Veteran status does not play a role in reverse mortgage eligibility.

 

Geographic Requirements

Reverse mortgages are available in all 50 states. A senior’s geographic residence is not a factor in eligibility however it does play a role in determining the maximum allowable loan amount. Persons residing in counties with higher home values are eligible for higher loan amounts.

 

Property Requirements

-The home must be the senior’s primary residence; a borrower can live in a nursing home or other medical facility 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, but 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.

Other Requirements

Seniors must meet either in person or on the phone with a government counselor to ensure they understand the consumer protections built in the loan, other loan options and the tax and other financial implications of taking the loan.

Benefits of Reverse Mortgages

Types of Benefit Payout

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 an existing mortgage or make a major purchase such as retro-fitting a home to improve its accessibility for the elderly. Medicaid & 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 or for as long as the home is their primary residence. This is referred to as a “reverse annuity mortgage”.
• Line of Credit – This allows the senior to decide when they need the money and how much to borrow. Interest is not charged on the balance of the loan which is not taken.

Restrictions on How Payout Can be Used

There are no restrictions on how the proceeds from a reverse mortgage can be used.

 

Benefits Amounts & Limits

A very general rule of thumb is that seniors can borrow a maximum of around 75% of their home’s value. The Federal Housing Authority sets maximum borrowing amounts which are determined by US county and updated annually. As Jan. 1, 2009, these limits range from $271,050 in low cost counties up to $625,500 in high cost counties. This means that even if a home is worth more than this amount, this is the maximum that can be borrowed.  If a home is worth less than this amount, then the maximum amount that can be borrowed is based on the home’s actual value. 

 

Other factors that determine how much seniors can borrower include their age, interest rates and equity owned. The older the home owner, the higher value the home and the more of the home the senior owns, the greater the amount they can borrow.

 

At this link the AARP provides a reverse mortgage calculator.

 

Time to Receive Benefits

Reverse mortgages typically take 4-8 weeks to process.

 

This Source Can Help For

These resources can be applied towards any purpose the homeowner or their family desire including:

-In-home care
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care

Costs of Reverse Mortgages

Typically all of the fees associated with a reverse mortgage are added to the loan balance, so the senior pays nothing out of pocket. However by adding them to the balance, they will have to pay interest on the fees. 

 

Calculating the true cost of a reverse mortgage is complex. The short answer is that the costs of reverse mortgages are relatively high compared to that of a conventional mortgage. An approximate range is 4%–8% of the loan amount. Reverse mortgage lenders are required to provide borrowers a complete breakdown of costs in a document known as a TALC, or Total Annual Loan Cost. This can be used to compare costs from different providers.

A more detailed answer regarding the cost of a reverse mortgage is that it consists of a variety of fees.

• Origination / Activation Fee
  This fee is either $2,000 or 2 percent of the maximum claim amount (which usually equals the home’s value) whichever is greater. For a home valued at $250,000, this fee would be $5000. This fee covers a lender's expenses and margin.
• Mortgage Insurance Premium (MIP)
  Seniors pay a MIP of 2% of home’s value plus an annual premium equal to 0.5 percent of the loan balance, which is paid monthly. For a home of $250,000, this is a one-time fee of $5000 and monthly payments of $105. Note the 2% upfront fee can be waived if the sole purpose of the reverse mortgage is to acquire long term care insurance.
• This insurance guarantees that if the lender goes out of business, the government will continue to pay the senior in their place. It also guarantees that seniors will never owe more than the value of their home, even if it declines in value.
• Home Appraisal Fee
  Appraisal fees usually range from $300-$400. During the appraisal, the home is also checked to make sure it meets federal safety and structural regulations. If it does not, there may be contractor costs to make the repairs.
• Other Fees
  Many other smaller fees may be charged such as document preparation, credit reporting fee, flood certification, pest inspection, property survey, monthly service etc. In total, these might be $1000.
• Other Costs
  If there is an existing, fixed, low rate mortgage on the house that is being replaced with a higher rate reverse mortgage, then there is the hidden cost of the increased APR.

Borrowers are required to keep the home in good condition. There may be ongoing repair costs that the homeowner might not otherwise have made.

How to Apply for a Reverse Mortgage

There are two steps that persons interested in reverse mortgages must undertake.

Step 1) Locate a reverse mortgage lender. An organization that is recommended for its excellent customer service is One Reverse Mortgage. Click here to visit their website.

Step 2) Before a reverse mortgage application can be processed, the government requires borrowers to speak with an approved reverse mortgage counselor. There is no charge for this and it is very helpful for individuals to fully understand the benefits and limitations of a reverse mortgage from an individual without a financial incentive to sell one.

Click on Reverse Mortgage Counselors to go to the federal government’s website where phone or face-to-face meetings with counselors can be arranged.

Seniors interested in calculating how much money they could generate from a reverse mortgage on their current home can use this reverse mortgage calculator.