Paying for
Staying at Home:
Reverse Mortgages
By Lisa
Nachmias Davis
Attorney at Law
59 Elm Street, Suite 540
New Haven, CT 06510
203-776-4400
Fax:
davis@sharinglaw.net
(A version of
this article was originally
published in the Summer 2002 issue of the
Connecticut Bar Association Elder Law Section Newsletter)
Revised to September 4, 2020
Many benefit programs are available to help seniors "stay at home" while receiving needed services. For many, however, asset and income limits severely restrict access to programs. Moreover, caps on care costs limit the programs' utility for patients requiring round-the-clock or other expensive care. The "well" spouse may simply be unable to maintain the "ill" spouse at home when the couple's only resources are Social Security and CHCPE benefits.
The reverse mortgage can serve as an important weapon in the arsenal for those seniors age sixty-two or older fighting to remain independent, self-sufficient, and at home. This article does not fully explore all the details of reverse mortgage options, but rather, endeavors to raise awareness of the role the reverse mortgage may play. For a detailed discussion, the reader is commended to www.reverse.org and the materials on the AARP website, www.aarp.org/revmort.
Reverse Mortgage Basics.
With a "reverse mortgage," the lender has the right to repayment only when the property ceases to be the senior borrower's home (or in some cases, after a fixed date). That might occur upon death, sale, or permanent relocation to a nursing home or other living arrangement. No loan repayment is required until that time. Because there is no ongoing payment obligation, the borrower has no financial qualification requirements (but may be required to escrow for taxes and insurance if there is a history of failure to pay). Finally, the reverse mortgage is "without recourse": repayment is made only from the home's equity (typically, upon sale), with no debt remaining against the borrower's estate.
Of
course, the
lender risks that the debt plus accrued interest may exceed the value
of the
home. Accordingly, the borrower typically is limited in the amount of
equity that
may be accessed by the reverse mortgage. Federally guaranteed and
Fannie Mae
mortgages, the most common varieties, also limit the loan amount,
notwithstanding the value of the home. The younger the borrower, the
less that
may be available, because of the likelihood that more interest will
accrue over
the borrower's longer life expectancy. Typically the amount received is
reduced
by fees and costs of several thousand dollars; if financed, the
interest on
these amounts accrues from day one even if the borrowed "line of
credit" is otherwise unused.
The risk borne by the lender is also offset by the interest rates charged for reverse mortgage loans. Historically, reverse mortgage loan rates have been well above the rate applied to standard home equity loans, typically one or two points above the Treasury bill rate.
Payment options vary considerably. The borrower may take the loan as a lump sum, a fixed number of payments, an annuity measured by a life or lives, or as a line of credit. Generally, even if the arrangement is for a line of credit, only 60% of the line may be accessed in the first 12 months.
A
commercial
reverse mortgage is available only to individuals sixty-five or older
with a
real estate interest in their home. The
owner does not have to own the entire
home. It is a little-known fact that even when the senior owns only a
"right of occupancy" or "life estate" in the home, the
senior may qualify for a reverse mortgage provided the other owner
agrees to
the mortgage, including the provisions by which the mortgage comes due
upon the
senior borrower's death or relocation to a nursing home.
Reverse Mortgages and Long-Term Care Costs.
The reverse mortgage will probably be insufficient, in and of itself, to meet the needs of the cash-poor homeowner needing significant nursing care at home. Round-the-clock care -- even using low-paid aides for part of the daily shift -- can easily exceed $13,000 per month. So when can a reverse mortgage make sense?
For
the purposes
of benefit eligibility and contributory requirements, reverse mortgage
payments, because they are loan payments, are not treated as income.
The
pertinent rule is in section 5050.61 of the Department of Social
Services
Uniform Policy Manual, which holds
It is
important
to remember that (1) all liens must be paid off at the time of closing
on the
reverse mortgage and (2) technically, a recipient of aid from the state
must "seek consent" from the state in order to grant a mortgage.
If it is likely
that State care will be insufficient, it may be better to obtain the
reverse
mortgage line of credit first and then apply for the home care program,
even
given the high expenses charged by the reverse mortgage, which will
begin to
accrue interest immediately. It's also important to remember that
the homeowner must be occupying the home when the mortgage is approved
-- very tricky to get a reverse mortgage to pay for home care if the
person is already in an institution. If the home does not meet FHA
requirements, part of the loan must be used to repair the home.
There are also credit counseling requirements. If the homeowner
is not mentally competent, a power of attorney may attend the
counseling sessions instead, but if the power of attorney document is
too recent, there may be problems. Bank rules prefer that the
homeowner participate.
One reverse mortgage originally designed to meet long-term care needs was the little-publicized CHFA reverse mortgage offered by the State of Connecticut for low or moderate-income seniors (maximum income $76,000) age 70 and older who can demonstrate that they need the loan to pay for long-term care needs. The loan only made payment with a modest lump sum to meet expenses such as property taxes, and otherwise was payable as an annuity. Similar "single purpose" loan programs exist in other states. Rumor has it that few if any CHFA reverse mortgages are being issued, yet they are still publicized on the CHFA website.
Despite
high
real estate values in
The Real Costs.
The catch in many reverse mortgages is indeed the up-front cost imposed in addition to interest. While the principal and interest may be recovered only upon "maturity" -- when the senior vacates the home – these other charges are subtracted from the loan amount, often up-front, so that the net amount available is less than would first appear. For the mortgages that permit the highest payout, particularly those where the line of credit increases using a cost of living factor, the charges can be as high as $15,000 up front, and the lowest charge is approximately $3,000. If not paid out of pocket, these costs accrue interest from the day of the closing whether or not the borrower ever actually uses the line of credit. Given that there are limits on the amount of equity against which the borrower can borrow, and then limits on the maximum loan amount, the younger the borrower, the tinier the mortgage proceeds may be. These costs do not apply to CHFA mortgages.
In
addition to
these often substantial costs, some proprietary mortgage lenders used
to demand
an "equity-sharing" provision. The lender would offset the downside
risk -- that the debt may exceed the home's value -- with an upside
risk, in
which should the home sell for more than it was worth at the
time the
loan is taken out, the lender shares in the growth, i.e., recovers more
than the borrowed amount plus interest.
This approach is now widely considered abusive.
Although Fannie Mae discontinued the equity
share option on Home Keeper loans effective
Example: For a 75-year-old widower in
|
Available: |
|
|
|
1) Maximum loan amount: |
$168,819 |
|
|
2) of which maximum up-front: |
$95,739 |
|
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3) OR a monthly loan
advance for |
$794-816/mo |
|
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4) OR any combination of
lump sum at closing, creditline |
||
(Example from AARP website.)
Additional information.
The website of
the national trade
association, www.reversemortgage.org has useful
information and a calculator like the one above; www.reversemortgage.net hows which
banks in
The reverse mortgage, when obtained in conjunction with a realistic review of needs, benefits, and financial resources, can be a useful way to pay for staying at home.
DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE
