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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 | ||
As of October of 2010, there were 2 types of reverse mortgages; the standard Home Equity Conversion Mortgage and the newly introduced Home Equity Conversion Mortgage Saver, referred to as HECM Standard and the HECM Saver for short. The difference, in brief, is that the HECM Saver has lower upfront costs and is better for persons seeking a shorter term mortgage. The HECM Standard has higher upfront costs but allows persons to borrow a larger percentage of their home’s value in the mortgage.
In most cases, the HECM Saver’s lower upfront costs make it more appropriate for persons wishing to use the proceeds from a reverse mortgage to pay for long term care.
A Historical Note
Prior to the financial crisis of 2008, there were 3 types of reverse mortgages; the HECM Standard, the Fannie Mae Home Keeper® and Jumbo Reverse Mortgages. The Fannie Mae Home Keeper® was discontinued and Jumbo Reverse Mortgages, for higher value homes, became more or less obsolete as the government increased the limit on how much can be borrowed with the HECM Standard.
Quick Facts about Reverse Mortgages
- Home owners can never owe more than their home’s value.
- Lenders cannot force seniors out of their homes.
- Senior homeowners usually qualify because credits scores and incomes are not considered.
- 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.
- They do not affect one’s Medicare or Social Security benefits.
- Reverse mortgages can be re-financed; therefore a down real estate market should not be a consideration factor.
- Depending on the type of reverse mortgage, closing costs are from 2% - 8% of the loan amount.
- Approximately 20% -70% of the home’s value can be borrowed.
- There are no restrictions on how the money can be used.
When is a Reverse Mortgage Appropriate?
Every family’s situation is different and in some cases a reverse mortgage is not the best option. Follows is an exploration of different scenarios 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 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, 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 when 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 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, the rules allow one year 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 a Geriatric Care Manager or Medicaid eligibility expert prior to making the reverse mortgage decision.
Using Reverse Mortgages to Purchase Long Term Care Insurance
In an effort to encourage families to purchase 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.
-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
-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.
-The housing unit must be a single family home, 1-4 unit homes with one unit occupied by the borrower, a HUD-approved condominium or FHA approved manufactured home.
- 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.
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care
The costs of reverse mortgages are relatively high compared to that of a conventional mortgage although the creation of the HECM Saver has changed this somewhat. An approximate range is 2% – 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.
- Origination / Activation Fee
This fee is either $2,500 or 2 percent of the maximum claim amount (which usually equals the home’s value) whichever is greater with a cap of $6,000. 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)
For the HECM Saver, seniors pay a MIP of 0.01% of home’s value plus and an annual premium 1.25% of the loan balance divided into 12 monthly payment. For a home valued at $250,000 with a reverse mortgage loan of $150,000, the upfront is $25 and the annual payments are $1,875.
For the HECM Standard, seniors pay a MIP of 2% of home’s value plus and an annual premium 1.25% of the loan balance divided into 12 monthly payment. For a home valued at $250,000 with a reverse mortgage loan of $150,000, the upfront is $5,000 and the annual payments are $1,875. While this option is 10 -20% more costly, it allows one to borrow a higher dollar amount against their home.
MIP insures that if the lender goes out of business, the government will continue to pay in their place and it 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.
Step 1) Locate a reverse mortgage lender. An organization that is recommended for its excellent customer service is Reverse Mortgages Only. 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 .
