I often discuss with clients what issues they might want to address when putting together a care plan. We talk about the importance of estate planning, as well as having a clear and detailed health care directive to address their end-of-life decisions. Another subject matter high on the list is how to pay for the care that may be needed.
There are many ways to pay for care, from private pay (using savings or retirement plans), to long-term care insurance, to Medicaid (government-subsidized when one’s assets have been sufficiently spent down). For clients who live in a house that is mortgage-free, or clos to mortgage-free, a reverse mortgage may also be worth exploring.
With a traditional mortgage, equity is pulled from the house and then repaid (with interest) each month over a period of years. Typically, one does not “see” the money coming from the mortgage as it is used to purchase the house or to pay for improvements. What one does “see” is the mortgage payment which must be paid monthly; failure to pay can result in the lender foreclosing on the house.
A reverse mortgage is quite different, in that it does not generate the need to make monthly payments. In a reverse mortgage, in fact, no payment on the mortgage is due until the owner(s) of the home are either deceased or no longer living in the home. The purpose of the reverse mortgage is to be able to convert a portion of the equity in your home to cash. This cash could be used for a multitude of purposes, including paying for in-home care so that you and your loved one can remain in your home. Typically, reverse mortgages can be set up for a lump-sum payment, an equity-line of credit, or a monthly payment to the homeowner. Imagine getting a check every month with a mortgage, rather than having to send in one!
It is true that reverse mortgages are much more expensive than traditional mortgages, and there are both age and equity requirements to qualify. The amount of the loan depends on the age of the borrower(s) and the appraised value of the home. Because there is no requirement to make monthly payments, there are no income requirements as found in traditional mortgages. When the mortgage becomes due (typically at the death of the homeowner(s)), it must be repaid, usually through the sale of the home. What happens, I am often asked, if the value of the home drops after the money is taken out and is worth less at the time of sale than what is owed on the reverse mortgage? The worst-case scenario is that the bank “takes” the house and it is not part of the decedent’s estate to be passed down to the heirs; neither the estate, nor the beneficiaries of the estate become personally responsible for the loan in any way. While some are put off by this, wanting their children to get the house at their death, I would suggest that the house is an asset which should be used for one’s own care, rather than protected for distribution in a will.
A reverse mortgage is NOT for everyone and it is important to work with a qualified, and ethical, reverse mortgage broker to learn if is a viable option for you. However, I do think it is often worth exploring – it is difficult to make an educated decision about anything without first gaining the education.
If you have any questions or comments, please do not hesitate to contact me.