Use reverse mortgage for long-term care or insurance? Robert Powell, Special for USA TODAY
Q: I’m thinking about using a reverse mortgage as a way to pay for long-term care, if needed, instead of paying premiums on a long-term care insurance policy that I may never use. I don’t have a mortgage, and my home is worth $500,000. I’m 66, my wife is younger than me, and we are relatively healthy with family history of longevity. We don’t have anyone to leave our home to. We already have the funds to pay for one to two years in a nursing home, but the reverse mortgage loan would certainly reduce the amount of our own funds we might need for such a placement. FYI: I worked for many years in the nursing home industry, and I know that most nursing home residents do not survive for much more than a year. — Alan Rubin, Wading River, N.Y.
A: The answer you get to this question depends on whom you ask. Reverse mortgage experts will say one thing: Yes. Long-term care insurance experts will say another: No. And fee-only fiduciaries will likely detail the pros and cons to your plan, the trade-offs and some alternatives.
Let’s start with a reverse mortgage expert. “Reverse mortgages are a great way to pay for long-term health care,” says Colette Gray, a senior loan officer with Home Safe Reverse Mortgage in Los Angeles area and blogger at The Reverse Mortgage Guide.
What do long-term care experts have to say? You can certainly use a reverse mortgage to pay for long-term care, and your plan may very well work, says Tobe Lynn Gerard, a certified long-term care specialist. But there are “just too many unknowns” and assumptions, she says.
Reverse mortgage limits your choice to move. What to do then? Experts including Harley Gordon, president of the Corporation for Certification for Long-Term Care, in Durham, N.C., suggest using the funds you now have earmarked to pay for long-term care, if you need it, and buying a combination — life/long-term care — insurance policy, perhaps with a one-year waiting period. Also, apply for the reverse mortgage, but use it only in the case of emergencies.
There are pros and cons on whether a reverse mortgage. And here’s what the folks at the National Reverse Mortgage Lenders Association had to say: “If you take a Home Equity Conversion Mortgage (HECM) — the FHA-insured reverse mortgage — and establish a line of credit, and then only draw on it when you have in-home care expenses, the unused line of credit will continue to increase over time and you will only accumulate interest on what you have used. In some instances, this approach might make more sense than paying premiums on a long-term care policy.”
Ultimately, there are only a few ways to pay for long-term health care expenses, including nursing home costs: You can fund this expense with assets (including a reverse mortgage) and income; insurance in combination with self funding; and Medicaid.
Bottom line: “I think he should be discussing this with his financial adviser to weigh all of the options that he has to see if a reverse mortgage is truly the best way to go,” says Gerard.
An Overview of Reverse Mortgages. For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home-equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest. A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title “reverse mortgage”.
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money for a down payment for a second home or to pay off debt. Popularity is skyrocketing. Over the last five years the number of reverse mortgages nationwide has tripled. The uses of this untapped wealth are only limited by a person’s imagination.
For those seniors who are less fortunate but own a home, a reverse mortgage can allow them to remain in the home by creating extra income. It can also allow for remodeling or repairs and when the time comes to sell, the investment in the home can make it more valuable.
A reverse mortgage is a loan against the equity in your home that provides you cash advances, but requires no mandatory monthly re-payments during the life of the loan. If the interest is unpaid, it is allowed to accrue against the value of your home. If you do choose to pay any portion of the interest, it may be deductible against income, as would any mortgage interest.
You must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home] in order to qualify for a reverse mortgage.
There are no income, asset or credit requirements. It is the easiest loan to qualify for.
A reverse mortgage is similar to a conventional mortgage. As an example:
The bank does not own the home but owns a lien on the property just as with any other mortgage
You continue to hold title to the property as with any other mortgage
The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
There is no penalty to pay off the mortgage early
The proceeds from a reverse mortgage are tax-free and available as a lump sum, fixed monthly payments for as long as you live in the property, a line of credit; or a combination of these options. These proceeds can be used for any legal purpose you wish:
daily living expenses, home repairs and improvements, medical bills and prescription drugs, pay-off of existing debts
education, travel, long-term care and/or long-term care insurance
financial and estate tax plans, gifts and trusts, to purchase life insurance
or any other needs you may have. The amount of reverse mortgage benefit for which you may qualify, will depend on your age at the time you apply for the loan, the reverse mortgage program you choose, the value of your home, current interest rates, and for some products, where you live.
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds.
The loan is not due and payable until the borrower no longer occupies the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries.
The costs associated with getting a reverse mortgage are similar to those with a conventional mortgage, such as the origination fee, appraisal and inspection fees, title policy, mortgage insurance and other normal closing costs. With a reverse mortgage, all of these costs will be financed as part of the mortgage prior to your withdrawal of additional funds.
You must participate in an independent Credit Counseling session with a FHA-approved counselor early in the application process for a reverse mortgage. The counselor’s job is to educate you about all of your mortgage options. This counseling session is at no cost to the borrower and can be done in person or, more typically, over the telephone. After completing this counseling, you will receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.
Keeping money in a reverse mortgage line of credit will not count as an asset for Medicaid eligibility as this would be considered a loan and not a resource for Medicaid spend down. However transferring the money to an investment or to a bank account would represent an asset and would trigger a spend down requirement.
If a senior homeowner chooses to repay any portion of the interest accruing against his borrowed funds, the payment of this interest may be deductible (just as any mortgage interest may be). A reverse mortgage loan will be available to a senior homeowner to draw upon for as long as that person lives in the home. And, in some cases, the lender increases the total amount of the line of credit over time (unlike a traditional Home Equity Line whose credit limit is established at origination). If a senior homeowner stays in the property until he or she dies, his or her estate valuation will be reduced by the amount of the debt.
False Beliefs. “The lender could take my house.” Homeowner retains full ownership. The Reverse Mortgage is just a loan with a lien, like any other mortgage. You can pay it off anytime you like.
“I can be thrown out of my own home.” Homeowners can stay in the home as long as they live with no payment requirement.
“I could end up owing more than my house is worth.” The homeowner can never owe more than the value of the home at the time the loan is due.
“My heirs will be against it.” Experience demonstrates heirs are in favor of Reverse Mortgages.
The following material was taken from an article titled ” The Future in Reverse” by Rosana Remakom
Live Free of Monthly Payments. Cutting expenses is an issue for retirees living on fixed incomes. The most common use of a reverse mortgage is to pay off an existing mortgage, thereby eliminating what is typically the largest monthly household bill.
Avery Chenowith, a retired Marine Corps colonel, lives with his wife at Leisure World senior retirement community in Landsdowne , Va. Chenowith, 65, thought he had to pay off his first mortgage before he could think of getting a reverse mortgage. When he learned that wasn’t the case, he used a reverse mortgage to pay off his condo and leave him without a mortgage payment for as long as he and his wife live there.
“Now, without that mortgage payment, we are saving $1,400 a month. That’s $16,000 a year. We don’t have a worry in the world, and as our money builds up, we can take trips abroad.”
Dream Come True. In addition to eliminating mortgage payments, consumers can also draw on the equity in their homes. The cash can be used for just about anything: Buying a second home, taking vacations or realizing a lifelong dream-like buying a plane.
Thomas Hardington, 84, of Munhall , Pa. , had been flying planes since World War II. He belonged to a flying club when a friend offered to sell him a plane. His granddaughter mentioned the idea of a reverse mortgage as a way to purchase the plane.
“It sounded good,” Hardington says, “So we had the house appraised. It appraised at $149,000 and I got around $80,000.” Hardington used a portion of that money to buy his plane and the rest he tucked away in an escrow account. “The interest on the escrow account is more than what I could get in a bank,” he says. I’m thinking of buying a condo down in Naples , Florida and may use what I have in escrow to do that.”
Reverse mortgages may not be a fit for every situation, but they are worth considering. They can help people through a financial rough spot, provide financial security or a boost in lifestyle.
Put your home to work . When we think of mortgages, we think of borrowing money to purchase a home. You make a small down payment, borrow the rest of the money, and then make a mortgage payment every month over many years. As you do so, your mortgage decreases and your home equity increases.
Reverse mortgages are the flip side of this equation. Instead of making payments, you receive them. With each payment, equity is drawn from your home; your mortgage increases and your home equity decreases.
These payments can be divvied out to you in a lump sum, as a line of credit*, or through monthly payouts. According to the National Reverse Mortgage Lenders Association, the most popular option-chosen by more than 60 percent of borrowers-is the line of credit, which allows you to draw on the loan proceeds at any time. With a line of credit, you pay interest only on what you use. You continue to own your home, hold its title, pay property taxes, make repairs to the property and pay homeowners insurance.
The loan only comes due if you stop using your house as a primary residence, whether that is due to death, sale of the home or moving to a new primary residence. If the sales proceeds on the house equal more than the amount owed on the reverse mortgage, that excess money goes to you or your estate.
The loan also may be repaid at any time and doesn’t hinge on the sale of the home. You or your heirs can pay off the loan and keep the home. And your repayment obligation will never exceed your home’s value or sales price.
Within each loan program, the amount of money you are eligible for depends on your age, the current interest rate, and the value and location of your home. Generally, the older you are and the more your home is worth, the more cash you can get. Based on current interest rates (10-year T-bill was at 4.79 percent in mid-May), a 62-year-old with a $150,000 house could receive nearly $80,000 in a reverse mortgage. A 75-yearold could receive $96,719, according to the NRMLA’s online calculator. These numbers represent the cash available after paying all associated fees. The loan amount also is subject to federal loan limits, which vary by county.
A Brief Summary of Reverse Mortgages
There are little income qualifications, asset or credit (except for current bankruptcy) qualifications
The borrower(s) must be at least 62 years old
The property must be the borrower’s primary residence
The money is withdrawn tax-free, does not affect Social Security or Medicare benefits, and can be used for any purpose the homeowner wishes
The money can be received as a lump sum, a line of credit, a monthly payment, or any combination of these three options
There are no mandatory monthly repayments. Most programs can be repaid at any time without penalty (the interest may be deductible)
The title of the home does not change
The maximum loan amount is set by the lender
Home Equity Loan vs. Reverse Mortgage
Many people ask what the differences are between a Reverse Mortgage and a Home Equity Loan when examining options to access equity for a senior homeowner. Below is a side-by-side summary table comparing the attributes of both options:
Reverse Mortgages and Long-term Care Insurance. According to recent statistics, about 60% of the population will require some form of long-term healthcare services during their remaining lifetimes. A combination of home care, assisted living and nursing homes stays can last three to five years or longer. A senior’s average stay in a nursing home is about 2.5 years and the costs can easily exceed $90,000 annually. Home care can be expensive as well.
Most Americans recognize the need for a long-term care insurance program to both protect their assets and relieve any potential burden on their families. One major obstacle often voiced by seniors is, “How do I pay for this insurance?” Many seniors no longer have the income necessary to pay the premiums for long-term care coverage and most are not comfortable utilizing their savings for this purpose. While an individual can always ignore the issue and simply rely on the state Medicaid to provide such future care, this option may not always be the best one since a senior wanting Medicaid is required to spend down his assets to $2,000 or less before qualifying for these government programs. In addition a healthy spouse at home may be left with inadequate income and assets as a result of seeking Medicaid benefits. Also many states favor nursing homes for Medicaid services and relying on this welfare program will in most cases take away the options of receiving care at home or in an assisted living.
Traditionally, seniors have had three choices for funding the possibility of needing pay to help for chronic illness and professional care. Self-funding these expenses with personal savings, ultimately utilizing the government welfare programs, or purchasing insurance with existing income. Now there is a fourth choice available – taking advantage of the opportunities offered by reverse mortgage programs.
Proceeds from a reverse mortgage loan for paying long-term care insurance are typically set up as a monthly income to ensure money is available through the life of the policyholder.
The American Homeownership and Economic Opportunity Act of 2000 (H.R.5640) signed into law on December 27, 2000, supports the use of reverse mortgage proceeds for both long term care and long-term care insurance.
When a reverse mortgage is used to fund Long-term Care Insurance, the senior homeowner is using some of the equity in the house to protect the value of the home (and perhaps other assets), so the owner can remain confident about his or her estate value and that the heirs will receive the legacy the senior worked so long and hard to build.
The purpose of the following example is to show the advantages available to a senior homeowner to fund a long-term care (LTC) insurance policy with a reverse mortgage. While the premiums for LTC insurance may be considered high when paid out of a senior’s current income, these same premiums become far less significant when compared to the value of a typical senior’s home.
In the following example, a 65-year old has qualified
for a LTC insurance policy with these benefits: monthly payouts, lifetimes payouts, lump sum over 2 tears, very little credit qualifications, power of attorney’s accepted.
If the same 65-year old accessed some of the equity in his home, through the utilization of a reverse mortgage, he would receive an initial loan with the following attributes:
*************These are rates that are close, but the rates change weekly, so we may not be able to offer you these rates. This is more for example purposes.
Current Home Value
Assumed Home Appreciation Rate
4.0% per year average (compounding)
Reverse Mortgage Loan Program
FHA/HUD Home Equity Conversion Mortgage (HECM)
Original Net Principal (Loan) Limit
Average Interest Rate
Average Line of Credit Growth Rate
6.21% (The unborrowed portion of the reverse mortgage line of credit will be increased by an adjustable factor – 50 basis points above the borrowing interest rate charged.)
Based on the information above, you will note the following from the analysis that follows:
Home appreciation and the LTC policy benefits maintain parallel growth (NOTE – this mutual growth is not tied in any way – the LTC growth is assured through the policy, but the home value is subject to market risk).
The first year’s reverse mortgage debt of $21,010 is a combination of the closing costs, combined with the first years’ annual LTC insurance premium, plus the accrued interest on this debt for one year. The home value begins at $500,000 and the total LTC policy benefits start at $456,250.
By the end of the fifth year, the total reverse mortgage debt has increased by $27,097, while the home has appreciated by $108,326 and the total LTC policy benefits have increased by $98,325.
By the end of the tenth year, the total reverse mortgage debt has increased by $70,644, while the home has appreciated by $240,122 and the total LTC policy benefits have increased by $251,543.
By the end of the fifteenth year, the total reverse mortgage debt has increased by $128,103, while the home has appreciated by $400,472 and the total LTC policy benefits have increased by $447,094.
When a reverse mortgage is used to fund Long-term Care Insurance, the senior homeowner is using some of the equity in his or her house to protect the value of their home (and perhaps other assets), so they homeowner can remain confident about their estate value and that the heirs will receive the legacy the senior worked so long and hard to build.
Utilizing a Reverse Mortgage to Fund Long Term Care Insurance
Summary — Three Payment Options for Long-term Care Insurance
1. Pay the annual insurance premiums from current income.
$71,250 total out-of-pocket
Reduction of personal cash flow
2. Use some of the proceeds of a reverse mortgage to pay the annual insurance premiums, but voluntarily pay back only the interest costs on those borrowed funds each year.
$45,502 total out-of-pocket
Significantly smaller reduction of personal cash flow, but you purchase the same insurance protection
Small reverse mortgage balance made up of closing costs plus LTC insurance annual premiums
Payment of mortgage interest may be a deductible expense
Premium costs may be offset by home appreciation
3. Use the Proceeds of Reverse Mortgage and Allow the Interest to Accrue.
$0 out of pocket
No reduction of personal cash flow
Larger reverse mortgage balance of closing costs, plus LTC insurance premiums, plus accrued interest
These costs may be offset by home appreciation
The Risk of Serious Illness and Reverse Mortgages
Seniors have worked hard all of their lives to create a financial estate from which they plan to live their retirement years to the fullest and leave a significant legacy to their beneficiaries. Among the primary issues threatening this goal for senior homeowners today are the costs and management of a serious illness and the way it may affect their current lives and future plans.
For a married couple, the anxiety surrounding the incapacity of one spouse and their sudden dependence on the other can be disquieting and often overwhelming. For all seniors, the hope of living longer combined with the fear of outliving their finances is becoming a startling reality as expenses continue to rise and savings rates remain historically low. Senior homeowners may face any of the following circumstances regarding the costs of long-term health and medical care should serious illness befall them:
the possibility of losing their home
the choice between a nursing home vs. preferred in-home care
the rapid depletion of their financial security
the inability to leave a legacy to those they love
A reverse mortgage is the one financial instrument that can help to address many of these uncertainties. Through the withdrawal of some of the equity in a senior homeowner’s primary residence and the proper utilization of those funds, a number of factors are changed which significantly improve the state of affairs regarding the potential risks of a serious illness.
Estate Planning and Reverse Mortgages
While a home may hold a great deal of emotional value for a family, the reality is that, in most cases, the property is sold after the owner’s death and the assets are liquidated. The heirs are often forced to sell the property under “less than ideal” conditions. After the sale, which may drag on due to the state of the real estate market, heirs may be faced with inheritance and/or capital gains taxes on the proceeds. In the end, the net proceeds are often far less than the actual or perceived value of the home. A reverse mortgage, and the use of some of the proceeds to purchase life insurance, can greatly alleviate many of these issues.
The full value of a home owned outright (mortgage free) is subject to estate tax, but a reverse mortgage lien against the property reduces its value – thus effectively lowering the estate taxes. A reverse mortgage must be repaid when the borrower permanently leaves the property. At death, the full value of the property would not be included in the estate valuation for tax purposes because the accumulated debt of the reverse mortgage would not yet have been repaid thereby reducing the property value, which should lower any applicable taxation.
In addition, accrued interest in the reverse mortgage may be available as a tax deduction upon repayment of the loan (just as forward-mortgage interest is deductible against income.) [NOTE – it is recommended the borrower consult their tax advisor]
When tax-free monies from a reverse mortgage are used for the purpose of funding insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner.
A reverse mortgage can offer senior homeowners the ability to strengthen both their current financial cash flow challenges as well as help protect their financial future. When a senior homeowner utilizes these funds to purchase investments that protect their health and well being and enhance the total worth of their estate, the value of a reverse mortgage is truly realized.