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Private Funds: Reverse Mortgages
Using a Reverse Mortgage to Pay for Senior Living Expenses

Reverse home mortgage

A reverse mortgage is a loan for homeowners over the age of sixty-two (62) who choose to use some of the equity as collateral, allowing them to receive cash against the value of the home without selling it.

A reverse mortgage comes due when the last surviving homeowner moves out or passes away. So if you hope to use a reverse mortgage to pay for assisted living, know that one of the co-borrowers must remain living in the home in order to qualify for a reverse mortgage loan. Once the surviving homeowner permanently moves out or passes away, the loan is due. Unmarried couples or siblings can apply together as co-borrowers and receive the same rights, as long as both people are over age 62.

After paying off the reverse mortgage, the remaining equity goes to the estate. If the sale of the home is less than the loan balance, the estate is not personally liable because the reverse mortgage repayment amount cannot exceed the proceeds from a sale of the property. So, the family may not have a house to inherit, but the family will not have a debt to repay either. Some reverse mortgages cannot be refinanced. Before getting involved in a reverse mortgage, learn the terms of the loan.

Qualifying Stipulations of Reverse Mortgages

  • Receive a lump-sum payment, a monthly payment, or a line of credit
  • No restrictions exist on how to use the remainder of the money
  • Live in the home and you retain title and ownership of it
  • Pay taxes, hazard insurance, and home repairs
  • No repayment is due as long as a homeowner continues to live in the home
  • When the last borrower, usually the remaining spouse, dies, sells, or permanently moves out of the home, the loan is due. The amount owed depends on payouts and interest of the loan

Qualification Requirements for Reverse Mortgages

  • Be 62 years of age or older
  • No requirement for income or credit history to qualify
  • The home is the primary residence for a co-borrower
  • Things to know before applying for a reverse mortgage:
  • Meet with an approved reverse mortgage loan advisor before starting the process and decide if a reverse mortgage is the best option.
  • Commit to use the funds to pay off an existing mortgage or other debt against your home first, if one exists
  • Make home repairs
  • It is not taxable nor does it affect Social Security or Medicare benefits
  • Does not count as income for Medicaid eligibility

Having a reverse mortgage closes the door to additional home equity loans. But refinancing is a possibility, if the house increases significantly in value. (Check with the loan officer before signing the bottom-line). If your heirs want to keep the home, they can repay the reverse mortgage. They're able to keep the difference if the home's sale price is greater than the reverse mortgage loan balance when they repay the loan

Reverse Mortgage Pros and Cons

Pros

  • Allows a homeowner to stay in the home
  • Pays off outstanding mortgages
  • Easy qualification because no minimum credit score and no income requirements
  • No monthly mortgage payments are due for as long as the homeowner lives in the home
  • Only pays property taxes and insurance
Pay for aging care

Receives flexible terms: Credit line for emergencies, Monthly payments - Lump sum distribution, or any combination, It can never get "upside down" so the heirs are not liable for more than what the home is worth, After repaying the loan, the estate inherits the home and keeps the profit. Loan proceeds are not taxable. Interest rates usually are lower than traditional mortgages and home equity loans.

Cons

  • The fees are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest closing costs are:FHA mortgage insurance and the origination fee. Other deterring factors:
  • The loan balance grows while the value decreases
  • It affects Medicaid and other government assistance, if funds are not spent
  • Extremely complicated - so get advice from an expert before applying for one.

Use Caution

If you have a reverse mortgage, stay current on property tax obligations and insurance. If you fail to keep up with property taxes, you face foreclosure. If you become frail and ill and need to move, the reverse mortgage is due. Reverse mortgages are complex products, and specialists caution those interested to compare carefully the costs and benefits of various loans.

Types of Reverse Mortgages

Home Equity Conversion Mortgage

The Department of Housing and Urban Development (HUD) offers Home Equity Conversion Mortgages (HECM) and the Federal Housing Administration (FHA) insures them. HECMs represent ninety percent (90%) of the reverse mortgage market and are the most popular. The federal government regulates the upfront costs and have set limits on the total fees and interest rates paid by the borrower.

While the HECM program operates like a conventional home equity loan, it features five flexible payment options:

Tenure - Offers equal monthly payments for as long as the borrower remains alive and maintains the property as a principal residence.

Term - Similar to a tenure plan, it offers equal monthly payments. However, the fixed amount payments, as selected by the borrower, continues for a set period of time.

Line of Credit - Unlike tenure and term plans, line of credit plans offer unscheduled payments at a time of the borrower's choosing and in the amounts the borrower requests until the line of credit is completely exhausted.

Modified Tenure - Combines both scheduled monthly payments with unscheduled payments on demand for as long as the borrower maintains the home as a primary residence.

Modified Term - Combines both scheduled monthly payments with unscheduled payments on demand for a fixed period as determined by the borrower.

Fannie Mae Home Keeper Loan

The Fannie Mae Home Keeper Loan is higher than for Home Equity Conversion Mortgage. Bottom-line: It's likely that a borrower receives more cash from Fannie Mae Home Keeper loans.

In most states, a borrower may choose among three payment options: tenure, modified tenure, and a line of credit. Borrowers may change payment plans at any time, and as often as you like, for a small fee.

Tenure option: Receive equal monthly payments for as long as you occupy your home as a principal residence.

Line of Credit option: Draw up to a maximum amount of cash at times and in amounts of homeowner's choosing, as long as it's occupied by you and is the principal residence. ***The option is not available in Texas.

Modified Tenure Plan: Sets aside a small amount of the loan proceeds as a line of credit and receives the rest in the form of equal monthly installments as long as borrower occupies the home as a principal residence.

Financial Freedom Cash Account Loans aka Simply Zero Cash Account

Financial Freedom Cash Account Loans are reverse mortgage loans with no up-front costs and designed for seniors who own high-priced homes.

It provides a line of credit that is not subject to the FHA limits, for as long as borrowers occupy their home. The minimum draw is $500 and the unused portion increases by 5 percent annually until maturity.

Home Equity Loans Differ from Reverse Mortgages

A home equity loan is a second mortgage or a line of credit. They have strict requirements for qualifiers like income and good credit. The homeowner must make monthly payments to repay the home equity loan. A reverse mortgage has no income or credit score requirements and the homeowner receives the monthly payments from the lender, not the other way around.

FHA determines the amount a homeowner can borrow by using a formula that takes age, the current interest rate, and the appraised value of the home in consideration.

The peak difference between a reverse mortgage and a home equity loan:

Reverse mortgage requires no payments - interest accrues and compounds on the loan until it becomes due, when the borrower sells the home, moves out for a period of 12 consecutive months or dies. A home equity loan requires monthly payments until the loan is repaid, usually for a term of 30 years.

Requirements

A home equity loan - maximum loan amount is (usually) restricted to 20 percent of the equity.

The amount of equity a reverse mortgage borrower can receive depends on the loan interest rate, the home value, the loan type, and distribution of payments: lump sum, credit line or monthly payments, and the age of the borrower. The younger the borrower--the more equity needed to qualify.

When older adults tap into home equity to pay for in-home personal and medical care, it opens the door to concerns over inflation. Inflation eats away at the value of your monthly payments received from the reverse mortgage. Worse yet, frailty or an illness may force the surviving co-borrower to exit the home--demanding the loan be paid in full. Before homeowners decide to opt for a reverse mortgage to pay for long-term care costs, start with HUD counseling; here's a list of approved agencies.

Be clear on:

  • Do you want to use the equity in the home to pay for long-term care costs?
  • Whether the equity value (amount received) covers inflated care costs and living expenses
  • The consequences of a reverse mortgage
  • List the home repairs needed after taking the home equity?
Carol Marak
Carol Marak

After seven years of helping her aging parents, Carol Marak has become a dedicated senior care writer. Since 2007, she has been doing the research to find answers to common concerns: housing, aging and health, staying safe and independent, and planning long-term.