Using Reverse Mortgages to Pay for Long Term Care

Definition

A reverse mortgage is a cash 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 (often couples will both sign) passes away or moves from the home for one full year. Most commonly, the loan is not paid back in increments, but instead the home is sold and the lender is paid back the full loan amount plus interest.

There are several types of reverse mortgages, but only one is relevant to the elderly looking to pay for senior care or home modifications; the Home Equity Conversion Mortgage (HECM), formerly referred to as HECM Saver. This reverse mortgage is insured by the United States Federal Government and is only accessible via a lender approved by the Federal Housing Administration (FHA).

 A Historical Note - The Department of Housing and Urban Development (HUD) regulates reverse mortgages and has been busy over the years since the financial crisis in 2008. A variety of types of reverse mortgages have come and gone and to help avoid confusion it is worth mentioning these artifacts by name. Previously available or irrelevant types of reverse mortgages include the HECM Standard, the Fannie Mae Home Keeper, Jumbo Reverse Mortgages, and HECM for Purchase. Also there are proprietary reverse mortgages, which are intended for high value homes. These are not federally insured, and therefore, are not relevant to this audience. 

Quick Facts for those Considering Reverse Mortgages
  • Homeowners can never owe more than their home’s value.
  • Lenders cannot force seniors out of their homes.
  • Loans become 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 one’s Medicare or Social Security benefits but can potentially impact Medicaid eligibility.
  • Reverse mortgages can be re-financed; therefore a down real estate market should not be a consideration factor.
  • Closing costs are from 2% - 8% of the loan amount.
  • Between 20% -70% of the home’s value can be borrowed.
  • There are no restrictions on how the money can be used.

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 but do have financial resources tied up in their home ownership.  For some of these seniors, a reverse mortgage is a good option but every family’s situation is unique and in some cases a reverse mortgage is not the best option. Follows is an exploration of different scenarios and why different families might want or not want to use a reverse mortgage.


Single Seniors in Fair Health
Reverse mortgages are a good option, as the individual 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. This is turn, make the home 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 will require them to move into assisted living or a skilled nursing home 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. Therefore, 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. Couples in this situation will often use the proceeds to purchase long term care insurance or make modifications to make the home more accessible 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
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 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.

 

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 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 and 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 and spend that money on their nursing home care until it is exhausted and then Medicaid will take over payments.  

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.

 

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

Individual Requirements
  • Age - Seniors must be at least 62 years old to qualify; there are no upper age limits. As seniors age, they become eligible for higher loan amounts. If both spouses are on the loan, the age of the younger spouse will be used to calculate the loan amount. 
  • 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 near future 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. Although 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.
  • 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 taxes and insurance, and has a history of paying their bills. Candidates on less solid financial footing may be required to set aside a certain amount of money 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 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 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 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 an existing mortgage or 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 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 that is not taken.
  • 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.

 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 70% of their home’s value. The Federal Housing Authority sets the maximum borrowing amount by county and updates these amounts annually. These limits range from approximately $275,665 in low cost counties up to $636,150 in high cost counties. This means that even if a home is worth more than this amount, this is the maximum amount 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 homeowner, the higher value the home, and the more of the home the senior owns, the greater the amount they can borrow.

 

Application Process

What to Expect

Reverse mortgages typically take 4-8 weeks to process.   Applicants should be aware that reverse mortgage salespersons are not necessarily financial planners or eldercare experts and they do not necessarily have a borrower’s best interest in mind. Therefore, it is important to seek objective advice when considering this option.

How to Apply

There are two steps that persons interested in reverse mortgages must undertake prior to receiving benefits.

1) Locate a FHA approved reverse mortgage lender. Click here to find lenders in your area

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.  Go to the federal government’s website where phone or face-to-face meetings with counselors can be arranged , or call 800-569-4287.


Costs of Reverse Mortgages

The costs of reverse mortgages are relatively high compared to that of a conventional mortgage.  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. 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, so while paying nothing out of pocket, seniors do pay interest on the loan fees.

Fees

  • Origination / Activation Fee - usually 2% of the home's value for homes valued up to $200,000. For homes that are over $200,000, an additional 1% is usually charged for the amount exceeding $200,000. This fee cannot exceed $6,000.
  • Mortgage Insurance Premium (MIP) – both initially and annually. The initial MIP ranges from .5% to 2.5% of the home’s value. The annual premium is equal to 1.25% of the loan balance divided into 12 monthly payments.
  • Service Fee – monthly fee that covers the cost of services provided by lenders, such as preparing account statements, making sure individuals keep up with the terms of the loan, etc., during the duration of the reverse mortgage. Monthly charge no more than $35. 
  • Home Appraisal Fee - usually ranges from $300-$600.
  • Other Fees - small fees, such as those for document preparation, credit reporting, flood certification, pest inspection, and property survey may add up to an additional $1,000.

 Other Possible 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 annual percentage rate (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.

 

Alternatives to Reverse Mortgages

 

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 (often couples will both sign) passes away or moves from the home for one full year. Most commonly, the loan is not paid back in increments, but instead the home is sold and the lender is paid back the full loan amount plus interest.

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.