As seniors and their families struggle to deal with the cost of long term care, reverse mortgages become a continuing topic. While seen by some as a convenient source of ready cash, this strategy can come with pitfalls that must be recognized in advance. One of the most consistent myths is that a reverse mortgage can be used to fund long term care outside the home either in nursing homes or in assisted living. Actually, because of default provisions written into the typical reverse mortgage, this tool is generally not the best idea to fund nursing home care. After a year outside the home for care, the mortgage would be in default and the house would typically need to be sold. Reverse mortgages are not intended to fund long term care outside the home.
A more appropriate use is to assist older people who are staying in their homes indefinitely and then only as a measure after others have been seriously considered. I call them “the last cookie jar.” If you need a little extra help to stay in the home and know you will stay there forever and you have a plan how you can do that a reverse mortgage can in some cases make a difference. They should not be used casually and it may be best to use the reverse mortgage option of a line of credit in many cases rather than either a lump sum or regular monthly payments. Then access to cash could be drawn down as needed, not as a regular matter.
What a reverse mortgage is. When a consumer who is at least 62 years old owns his or her residence and needs additional cash, either in a lump sum, monthly payments, or a credit line, one option could be to take out a reverse mortgage. The homeowner receives cash from a lender and, in exchange, gives the lender an interest in his property. He still owns his property and can live there. He does not need to make regular loan payments but is tapping into the equity on his house. If there is already a mortgage against the property, it must be satisfied to complete the transaction. Satisfying an existing mortgage with a reverse mortgage is expensive and should be avoided. Closing costs are higher than with traditional mortgages and there are continuing fees. Reverse mortgages still have an attraction for people who are “house rich and cash poor.” Just remember it is still necessary to pay property taxes and other expenses on the home even when you have a reverse mortgage.
The maximum amount the lender will provide is based on factors including the age of the borrower, value of the house, amount of equity in the house, and current interest rates. The older the borrower, the more that can be borrowed against the property since the lender may recover on its loan when the borrower dies. Death and extended living outside the house are events of default.
How Powers of Attorney Are Affected. What the power of attorney needs to know is that, when the person who takes out the reverse mortgage is out of the home for twelve months or more, the loan is in default and the lender can call the loan. If both parents live in the house and both are named on the loan, then the fact that one of them is in a nursing home for over a year will not place the loan in default but there could be other problems since using a reverse mortgage to pay a spouse’s long term care costs, would further reduce the equity for the spouse still living at home.
Another factor to consider is alternatives that may be available. Medicaid for nursing home care and Aid and Attendance, a Veterans’ benefit for wartime veterans in assisted living are the most common. Under either of these programs, the home would be exempted during the lifetime of the person applying for benefits although Medicaid has an estate recovery program to recover after death. An applicant can receive benefits while still owning a home.
What is important is to make an informed decision after weighing all the possibilities. Obtain professional assistance if you are unsure of results.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.