Using a Reverse Mortgage to Pay for Long-Term Care

A reverse mortgage is a loan where the home is used as collateral to get tax-free cash from the equity of the home without incurring monthly expenses.

Reverse mortgages guarantee that the homeowner can stay in the home for as long as he or she lives in the home as his or her principal residence and pays the property taxes and insurance and maintains the home in a reasonable condition—even if the outstanding loan and interest grow to exceed the property’s value. Reverse mortgage fees can be high, although fees are usually rolled into the loan and not paid up front. The costs associated with a reverse mortgage are very similar to those of a conventional loan.

A reverse mortgage can be a sound strategy to:

• Increase your income
• Pay unexpected expenses
• Pay off debts
• Make necessary changes to your home
• Make your home more accessible
• Help you use your home equity to pay for home care services you may need to remain in your home

Reverse mortgages can be used for any purpose including:

• Medical bills and prescription drugs
• Long-term health care
• Retirement and estate tax planning
• Daily living expenses

Eligibility Requirements

To qualify for a reverse mortgage:

• You must be at least 62 years of age or older to qualify. If there are multiple homeowners, the youngest borrower must be at least 62.
• Your property must qualify. Most standard residential homes will qualify, but some property types are excluded such as co-cops, bed and breakfasts, and working farms.
• You must live in the home as your residence. Rental or investment properties do not qualify.
• You must have enough equity remaining in your home—generally this means having at least 40% equity in the home in order to qualify, though the limits also vary depending on your age. Equity is calculated by taking the appraised value of your home and subtracting amounts owed to a mortgage or other liens on the home such as home equity loans.
• While your income may not be a direct factor, you must have the financial resources (either from income or savings) to continue to pay for the ongoing maintenance of the property such as property taxes, insurance, homeowner association fees and similar.
• You must not be delinquent on any federal debt.
• You must attend a counseling session with a HUD-approved reverse mortgage counselor.
• If you currently have a mortgage, you must use the reverse mortgage to pay off the balance of your conventional mortgage.

Reverse Mortgage Structure

A reverse mortgage may be received as a lump sum, as fixed monthly payments, or as a line of credit, or some combination of these options. For example, if you have an existing conventional mortgage, you might use a lump sum to pay off of the conventional mortgage and then receive the remainder of the reverse mortgage as monthly payments to you. Others take out a reverse mortgage as a line of credit “just in case” they need to tap it in the future.

Repayment

With a conventional mortgage, you borrow money from the bank and pay it back over time so the loan balance slowly decreases. With a reverse mortgage, you do not need to make monthly payments like you would with a conventional mortgage. Instead, the loan balance will increase due to the interest rate and any money that you pull from the reverse mortgage.

Another important consideration is that any remaining value on the home goes to the homeowner or his or her heirs when the house is sold. Home ownership is often a person’s most valuable asset. It is important to remember that getting a reverse mortgage is essentially the same as you withdrawing the money you would expect to leave to your heirs.

Repayment is due when a “maturity event” is triggered. Maturity events include:

• All borrowers are deceased.
• The property has been sold to a third-party.
• The property is no longer being used as a principal residence by at least one of the borrowers for reasons other than death.
• The borrower does not maintain the property as his or her principal residence for a period exceeding 12 months because of physical or mental illness.
• The borrower fails to keep the property insured or pay property taxes.
• The property has fallen into disrepair and the borrower either refuses or is unable to repair the property.

If a maturity event is triggered, the bank can demand repayment of the reverse mortgage in full, including requiring that the property be sold to repay the loan. When the property is sold, the sales proceeds first are applied towards paying off the reverse mortgage, if there are any remaining funds after paying off the reverse mortgage, they will go to the homeowner.

Potential Downsides of a Reverse Mortgage

Reverse mortgages can be a great retirement and long-term care planning tool in the right scenario, but they come with some potential downsides that should be carefully considered:

• If you move out of your home for medical reasons for more than 12 consecutive months, this is a “maturity event” that can trigger the need to repay the reverse mortgage.
• If you are potentially eligible for government benefits such as Medicaid or veterans benefits, the home is often non-countable for purposes of qualifying for benefits. In other words, you may not have to use up your home equity paying for long-term care if you qualify for government assistance for long-term care. If you are receiving government benefits such as Medicaid or veterans benefits and then are forced to sell your home in order to repay the reverse mortgage, any excess sale proceeds could disqualify you from continuing to receive the government benefits.
• The loan balance will grow over time as the size of the loan and the interest and fees thereon continue to grow. When you pass away, the reverse mortgage must be repaid. Unless your loved ones have the financial means to pay off the mortgage, this usually results in the home being sold to repay the reverse mortgage. Depending on the balance of the reverse mortgage, there may not be any leftover sales proceeds to pass as an inheritance to your loved ones.

In light of the above downsides, we strongly recommend that you consult with a qualified elder law attorney in Cary, NC before obtaining a reverse mortgage to ensure that it is an appropriate tool based upon your goals and circumstances.

We Can Help You Develop a Long-Term Care Plan

Having assisted many Wake County clients with long-term care planning, our team at Carolina Family Estate Planning understands that developing a long-term care plan is about not just protecting your own independence and dignity, but also protecting those you love from the physical, emotional, and financial toll that caring for a loved one can take.