Reverse Mortgages

The words Reverse Mortgage can feel scary. Many home owners fear these, believing that a reverse mortgage is the first step towards losing the home. That has happened to some families, but there are many myths about what a reverse mortgage is, and what benefits it might give. Allow me to explain.

A reverse mortgage is a financial product in which the bank lends the homeowners

money based on their age, and the value of the property. The age of the home owner matters, because the bank uses that to guess how long the money will be lent. You have to be at least 62. The older you are the more you can get because they know they will get it back sooner. This matters to the bank because many reverse mortgages are not paid off until the homeowner passes away. This is the opposite of a normal mortgage where the bank lends the homeowner money so that they can purchase the home. With a normal mortgage, the monthly payments slowly pay down the debt owed to the bank until you have the property free and clear. With a reverse mortgage, there are no monthly payments required. The bank lends money, and will charge an interest rate each month. The bank gets paid back either when the property is sold, or if a family chooses to pay it off to get away from the interest rate. In most cases no person ever pays back the loan. The bank gets reimbursed by foreclosing and selling the house. If the house sells for less than they are owed, no one is liable to the bank for the rest of the money.

Some people use a reverse mortgage for investment purposes. They find ways to make more money off the cash they borrow than will have to go pay back the bank, in the end. Personally I find that scary. If it does not work out, you bet the house! I’m not a good poker player, but I do know that you don’t bet the house.

In the world of elder law and Medicaid planning, there is another reason to use a reverse mortgage. If there is no other way to protect the house, then a reverse mortgage is an option to allow the value of the property to do some good. The typical situation is a single homeowner who wants to remain in their property, but needs long term care they cannot afford. This person goes onto Medicaid, which will then pay for their home care. The reverse mortgage money is available to help pay for the expenses of the home, or additional caregivers. But that money

does not need to be spent down before qualifying for Medicaid! As long as money from the reverse mortgage is never mixed with money from anywhere else, such as income, then it does not count towards the asset limit, which is typically $1,600. If the person on Medicaid cannot pay all their living costs on just their income, this is a way to have some savings as well. That way the home owner does not have to go live in a nursing home for purely financial reasons.

The benefit to the reverse mortgage is therefore that there are no monthly payments, ever. It is a great way to be able to use the value of the home in order to afford to stay there, if there is no other way to afford it. Of course, if you outlive the money the bank lends then there is

no way to afford to live there, and the house really must be sold. For this reason it does not make sense for younger people to take these out. At least not if the point is to be able to pay for the bills of the home. If you can’t afford the place, downsize. But if you are older, and having just a little extra cash will allow you to live the rest of your days in your own home, then it makes sense.

Attorney Halley C. Allaire is principal in the law firm of Allaire Elder Law, a member of the National Academy of Elder Law Attorneys, Inc., with an office at 271 Farmington Avenue, Bristol, (860) 259-1500, or on the web at www.allaireelderlaw.com. If you have a question, send a note to Attorney Halley C. Allaire and your question may be discussed in a future column.