I often get questions about whether a reverse mortgage is a good thing for a senior citizen to obtain. While a reverse mortgage can be helpful, the senior needs to make an informed choice and be aware of the legal issues involved.
Federal law provides that those who are sixty-two (62) and older can obtain a “reverse mortgage”. It is called “reverse” because the borrower obtains a loan from a bank and while the loan is secured by the borrower’s home, it does not have to be paid back until after the person dies or leaves the premises for a significant period of time.
The amount of money that can be borrowed depends upon how much equity--or value--the person has in the home, as well as the person’s age and the interest rate. The older the person is the more they can borrow. For example, at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home’s value while a 75-year-old could borrow up to 56 percent.
I generally tell people that reverse mortgages are good if the person is “cash poor” but “equity rich”. The value in that person’s home can help them meet their monthly obligations. The payments from the lender can be in a lump sum or in installments as needed. The loan can provide a guaranteed source of income, tax-free, for the rest of the senior citizen’s life. Most important, the money can help the senior to stay in his home.
However, in exchange for this benefit lenders do require significant closing costs as well as potentially higher interest rates. Moreover, the loan can deplete equity and reduce most of the inheritance that the senior citizen intended on leaving to his or her heirs.
What about a reverse mortgage’s impact on government benefits? The loan proceeds will not negatively affect either Medicare or Medicaid eligibility if handled properly. However, the loan has to be repaid when the borrower dies, sells the home, or no longer uses it as a primary residence. Some loans provide that if the borrower is absent for 12 months or more, the loan has to be repaid. This means that if the borrower enters a nursing home, the bank can require the loan to be repaid, forcing a sale of the home or resulting in foreclosure. This can generate a significant loss for the senior citizen since--especially in Michigan--homes are either not selling or are selling for a greatly reduced price. In any event, if the home sells and there is any remaining money greater than two thousand dollars ($2000), a nursing home resident’s Medicaid eligibility will be terminated unless the funds are handled according to law under a proper Medicaid plan.
Used wisely, reverse mortgages can be a great help to senior citizens. Nevertheless, awareness of pitfalls can reduce costly mistakes. Education of the public on the various issues surrounding reverse mortgages can help to maximize the benefits while eliminating the liabilities. Hence, Heritage Elder Law is committed to providing information helpful when considering the reverse mortgage issue. Together we can serve our growing senior population in their hours of greatest need.
