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.
There are several types of reverse mortgages, but only one of which is relevant to the elderly looking for 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).
Facts About 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 so it is 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.
Eligibility Requirements for Reverse Mortgages
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, then both of their ages are considered.
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.