Reverse mortgage lenders, the elder law bar and the public did not get off on the right foot when reverse mortgages became generally available. There were many confusing features to the initial loans and the government and banks did little to help borrowers understand their transactions. Reverse mortgages became known as the estate planning tool of last resort for truly financially needy elders. The elder law bar was hesitant to recommend reverse mortgages, estate planning lawyers put their heads in the sand and real estate lawyers, at least many of the real estate lawyers in Massachusetts that my law firm deals with, were completely in the dark on the workings of the benefits of reverse mortgages. So what has changed? In a word, education. The reverse mortgage industry made it their mission to educate the market place, not only consumers but also lenders about the powerful benefits of reverse mortgages.
As with any schooling it takes time. Sometimes you take the wrong class or get a bad professor, but if you stick to it great things can happen. This is the case with reverse mortgages. Lawyers, geriatric care managers, lenders, borrowers and other interested parties are now coming to see the place for reverse mortgages in elder law planning. To me, the key benefit of reverse mortgages is their ability to create peace of mind through financial independence (or “financial freedom”, Financial Freedom is one of the largest reverse mortgage lenders – they run those TV ads with James Garner). So there has been education; why else have reverse mortgages suddenly emerged as a viable planning tool for older estate planning clients? Life is expensive, particularly in states like Massachusetts where we seldom see a purchase and sale agreement for less than $400,000.
As the population ages and the housing market remains strong (yes, it is still very strong by historical measures – in the Boston area real estate is still considerably overpriced when taking all other aspects of the cost if living into account,) elders have more month than they have monthly income. Most reverse mortgages are used to convert home equity into a replacement for insufficient income. When you look deeper to the net effect of reverse mortgages is that more elders can stay in their own homes longer, more elders are able to afford home care services and more elders have the senses of financial freedom that only comes from knowing there is money in the bank. What’s not to love about reverse mortgages? Well, real estate brokers in Massachusetts don’t like reverse mortgages – they slow down the transaction pace and change the traditional marketing cycle of listing elders homes when they can no longer afford them. The assisted living industry doesn’t like reverse mortgages. How could they? They depend on elders giving up their old homes in return for 3 squares and a cot at their local "Happy Garden Loving Home for Golden Years on Smiling Hill Assisted Living and Schmaltz Factory."
I found this primer on reverse mortgages useful, not only for my elder law colleagues that follow the blog, but also for the general public that wants to learn more about the basic mechanics of reverse mortgages. Just remember that reverse mortgage laws can vary by state and also it is a good idea to consult and elder law lawyer in Massachusetts or your state before proceeding with a reverse mortgage or any estate plan or real estate transaction.
Reverse Mortgage Loans
For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a conventional home-equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest.
A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments, the cash flow is reversed and the senior receives payments from the bank. Thus the title "reverse mortgage".
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. Over the last five years the number of reverse mortgages nationwide has tripled. The uses of this untapped wealth are only limited by a person’s imagination.
For those seniors who earn low incomes but own a home, a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.
False Beliefs about Reverse Mortgages
"The lender could take my house." The homeowner retains full ownership. The Reverse Mortgage is just like any other mortgage; you own the title and the bank holds a lien. You can pay it off anytime you like.
"I can be thrown out of my own home." Homeowners can stay in the home as long as they live there, with no payment requirement.
"I could end up owning more than my house is worth." The homeowner can never owe more than the value of the home at the time the loan is due.
"My heirs will be against it." Experience demonstrates heirs are in favor of Reverse Mortgages. Virtually anyone can qualify. You must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home] in order to qualify for a reverse mortgage.
There are no income, asset or credit requirements. It is the easiest loan to qualify for. A reverse mortgage is similar to a conventional mortgage. As an example:
- The bank does not own the home but owns a lien on the property just as with any other mortgage
- You continue to hold title to the property as will any other mortgage
- The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
- There is no penalty to pay off the mortgage early
- When the loan becomes due, you can refinance and keep the house.
- The proceeds from a reverse mortgage are tax-free and can be used for any legal purpose you wish:
- daily living expenses
- home repairs and improvements
- medical bills and prescription drugs
- pay-off existing debts
- education, travel
- long-term care and/or long-term care insurance
- financial and estate tax plans
- gifts and trusts
- to purchase life insurance
- any other needs you might have
The amount of reverse mortgage benefit for which you may qualify will depend on your age at the time you apply for the loan, the reverse mortgage program you choose, the value of your home, current interest rates, and for some products, where you live.
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds. The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries. If the heirs want to keep the home with the additional equity, they can refinance with a conventional loan.
There are three reverse mortgage loan products available, the FHA-HECM (Home Equity Conversion Mortgage), Fannie Mae – HomeKeeper®, and the Cash Account programs. Over 90% of all reverse mortgages are HECM contracts..
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to your withdrawal of additional funds.
You must participate in an independent Credit Counseling session with an FHA-approved counselor early in the application process for a reverse mortgage. The counselor’s job is to educate you about all of your mortgage options. This counseling session is at no cost to the borrower and can be done in person, or more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.
You can choose 3 options to receive the money from a reverse mortgage:
- all at once (lump sum);
- fixed monthly payments (for up to life);
- a line of credit; or a combination of a line of credit and monthly payments.
The most popular option, chosen by more than 60 percent of borrowers, is the line of credit, which allows you to draw on the loan proceeds at any time. The line of credit also earns interest which in essence is allowing the equity in the home to grow. For example, $120,000 in a line of credit earning 5% would be worth almost $200,000 10 years from now.
Keeping money in a reverse mortgage line of credit in most states will not count as an asset for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. In other words, keeping the money in the line of credit will not disqualify you from becoming Medicaid eligible.
However, transferring the money to an investment or to a bank account would represent an asset and would trigger a spend down requirement and delay eligibility. Please note however that distinguishing between what a portion of reverse mortgage proceeds might be counted as a loan and what portion as an asset is not a simple black and white decision. It is best to get an opinion from and elder attorney in your state.
If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time (unlike a traditional Home Equity Line where the credit limit is established at origination). If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of debt.
At the death of the last borrower or the sale of the home, the loan is repaid from equity in the home. Any remaining equity (which is often the case) goes to the heirs.
Almost all reverse mortgages are the HECM loan which is guaranteed by FHA mortgage insurance. If there is not enough equity to cover the loan, the insurance satisfies the loan by paying the deficit. With a HECM loan, the bank will never come after the heirs to satisfy the mortgage obligation.