Is a Reverse Mortgage right for you?
If you currently own a home and have paid your initial mortgage, a reverse mortgage may be an option for you. However, if you are in a nursing home, a reverse mortgage may not be a good option for you. In order to determine whether a reverse mortgage is right for your situation, you must understand the rules and the consequences and consider your ultimate goals.
Most reverse mortgages require the applicant to be 62 or older and owner occupied. You may take the cash in a lump-sum payment, a monthly payment, a line of credit, or a combination of these options. Pay back is not required until you die, sell your home, or when your home is no longer your primary residence.
Long-term care is one of the main financial issues elders face today. Many of them comfortably live on just their social security and pension. However, the financial crisis begins when they start requiring more care. As the care level increases, the costs go up. In Bend, Oregon, cost of care home can range from $4,385 – $5,000, a month and the cost of nursing home can range from $12,000 – $14,000 a month 1. One year in a nursing home on the average will cost $144,000.
Medicaid nursing home benefits can pay for long-term care if one is eligible. In order to be eligible, the applicant must be a U. S. citizen or resident alien age 65 or older, blind or disabled, medically qualified, and financially qualified. To be medically qualified, the applicant must require a high level of care and must meet the level of care standards dictated by Oregon Medicaid rules. To be financially qualified, the applicant must have no more than $2,000 of “countable assets” in his or her name (if married, the healthy spouse can have up to $123,600 in 2018). The applicant’s monthly income must be less than the income cap of $2,250 and there are no transfers of assets within 5-years.
Many elders are faced with low monthly income from social security and pension. Some may be in need for more cash to pay their living expenses and other may need more cash to pay for long-term care. A reverse mortgage could be a great way to get cash.
The money you get from a reverse mortgage is not considered taxable since it is a loan. An interest deduction may be available for all the accrued interest in the year the reverse mortgage is paid off in full or in part.
Nothing Left Behind
Obtaining a reverse mortgage may use up the equity in the home and may not leave any assets behind for your children upon your death. So, if you want to leave the residence to your children, a reverse mortgage will not be a good idea. However, if your children are financially well off and have their own homes, a reverse mortgage could be an option for you.
The closing costs for reverse mortgages are higher than standard mortgages and include other fees such as servicing fees, insurance premiums (to protect the lender if the loan exceeds the value of the home) and interest. If you sell your home soon after you get your reverse mortgage, these costs will immediately reduce your equity. The longer you have a reverse mortgage; the higher your compounded interest. Therefore, if you plan on selling your home in the near future, a reverse mortgage is not right for you.
Required Full Pay Back of Reverse Mortgage
One of the requirements for the reverse mortgage is for the borrower to be an owner occupant. If an elder ends up in a nursing home, this owner occupancy requirement is no longer met and the financial institution will require the reverse mortgage to be paid in full. Therefore, a reverse mortgage will not work for a single individual in a nursing home, but may work for a married couple where one spouse is in the nursing home and the healthy spouse continue to live in the home.
Disqualification From Government Benefits
If you are on Medicaid or other government benefits, receiving a lump-sum of cash or receive monthly cash without spending it will increase your “countable asset” at the end of the month and may disqualify you from receiving such benefits.
The decision whether or not to take advantage of a reverse mortgage is a complicated one. Please review your ultimate goals before pursuing a reverse mortgage and seek help from a disinterested professional such as your estate planning attorney, certified public accountant, or an elder law attorney.
1 Genworth 2017 Cost of Care Survey, conducted by CareScout®, June 2017.