You want to stay in your house as you grow older, but you need a ready source of cash to pay your bills, now and in the future.
With a regular mortgage, you make payments to the lender, whether it is a bank or a credit union or some other kind of financial institution. With a reverse mortgage, you collect payments as long as you live in the house.
Who are good candidates for the reverse mortgage?
“People who are cash poor-they just have Social Security, not an Individual Retirement Account or other form of income, and they have paid off their mortgage, and they are very firm that they want to stay at home and do not want to go to an independent living community or assisted living, ” says Stephanie Schneider, an elder law attorney in Plantation, Fla.
And they also should be in relative good health, with the inevitable physical slowdowns common to aging, but nothing drastic. “We are not talking about people with chronic illness who get worse over time, with conditions like Parkinson’s disease or MS (multiple sclerosis), or other things that will require them to need round-the-clock care,” she noted.
The successful candidates for a reverse mortgage might need the help of home aides or other workers who make occasional visits to help with such things as bathing and dressing, or chores such shopping or cleaning or driving the homeowner to a movie or a doctor’s appointment.
When Schneider talks to clients about the reverse mortgage, she wants to know their priorities. Someone determined to stay at home is a good candidate. Someone determined to leave a financial legacy for the children as the top priority won’t go for the mortgage, because that results in the eventual sale of the house, reducing the potential inheritance for the children.
To qualify for a reverse mortgage, according to federal regulations, you must be 62 years old, “own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home.”
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.
You have a variety of ways in which you can get money from the reverse mortgage, according to the federal Department of Housing and Urban Development:
- “Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term- equal monthly payments for a fixed period of months selected.
- Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
- Single Disbursement Lump Sum – a single lump sum disbursement at mortgage closing.”
You have to pay the monthly utility bills, the real estate taxes, and insurance premiums on the home.
The mortgage must be repaid if the borrower hasn’t lived in the home for a year or more. And this is made more complex if other people are sharing the home. Here are the rules for repayment, as explained by the federal Consumer Finance Protection Bureau:
“If you are the only borrower on the HECM reverse mortgage and:
- You live alone, your loan will need to be paid off if you move to a nursing home or assisted living for more than 12 months. This will usually mean selling your home to pay off the loan.
- You live with a spouse or partner, your loan must be paid off if you move to a nursing home or assisted living for more than 12 months.
Warning: This will usually mean selling your home, and your spouse or partner will most likely have to move.
- You live with children, other relatives or unrelated roommates, your loan must be paid off.
Warning: This will probably require selling your home, and your children, relatives or roommates will most likely have to move.
If you are a co-borrower on the HECM reverse mortgage and:
- You live alone because your co-borrower has passed away or already lives elsewhere, your loan must be paid off if you move to a nursing home or assisted living for more than 12 months.
- You live with a spouse or partner who is a co-borrower on the reverse mortgage, your co-borrower can continue to live in the home if you move to a nursing home or assisted living. But if your co-borrower needs to move out too, and both of you are absent from the home for more than 12 months, your loan must be paid off.
- You live with other relatives or unrelated roommates. If your co-borrower still lives in the home, your other relatives or roommates can continue to live there too when you move to a nursing home or assisted living. But if your co-borrower also moves out and both of you are absent from the home for more than 12 months, your loan must be paid off.
Warning: This will probably require selling the home, and your relatives or roommates will most likely have to move.
Note: Usually, co-borrowers are spouses or partners. Co-borrowers are treated the same whether they are spouses, partners, relatives or just roommates.”
What about Medicaid, the federal-state program that pays the medical bills for poor people. If you have more than $2,000 in financial assets, you can’t get Medicaid. And it appears that the cash you got from the reverse mortgage could make you ineligible for Medicaid.
From a guide for consumers by the National Reverse Mortgage Lenders Assn, an industry group:
Q: Will I lose my government assistance if I get a reverse mortgage?
A: A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert.
Some additional tips and tricks you need to know about when considering a reverse mortgage.
The older you are, the larger amount of money you can get in a reverse mortgage. This leads some unfortunate borrowers into being tricked by lenders. They will say, you can get more money, so leave your younger spouse off the loan documents.
The result can be disaster. The borrower dies, and the house is sold. The younger spouse is kicked out because her name (it is usually the wife who is younger) because her name is not on the deed.
And the other danger is the salesperson who helps arrange the mortgage, and then tries to convince you to buy an annuity with a big chunk of cash from the mortgage. Don’t do it. Annuities have big upfront commissions going to the salesperson, and big penalties for early withdrawals. Your money is tied up, and that is something you don’t want to do as you get older.
Here is where you can go for expert and low-cost counseling on reverse mortgages:
All have been approved by the federal government.
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