The benefits and pitfalls of reverse mortgages in long term care planning.
Reverse mortgages may be a beneficial tool for long care planning. However, reverse mortgages can have negative consequences to medicaid eligibility.
What is a reverse mortgage?Federal law provides that those who are sixty-two (62) and older can obtain a reverse mortgage. A reverse mortgage is different from a conventional mortgage, in that you receive a check each month from the bank and do not need to pay them back as long as you live in the house. If the loan is made out to a married couple, as long as one of the spouses is living in the house, no loan repayment needs to be made. However, when both of the spouses must move, the loan plus interest must be repaid. If you are not able to pay off the loan, the house will be sold. However, you can never owe more than the home value. Therefore, if the amount of the loan exceeds the net proceeds from the sale of the house, the bank cannot recover the shortfall from you or your heirs. The amount you can borrow depends on your age, the value of your house, and the current interest rate. The older you are, the lower the interest rate is, and the greater the value of your home is, the more you can borrow.
Benefits of a reverse mortgageIf one spouse is in the nursing home and the other spouse remains at home, a reverse mortgage could give additional money to the healthy spouse. You can receive loan money as a line of credit, monthly installment, or a combination of these, or lump sum. The good news is that the loan money is not counted as income under the Medicaid rules, if handled properly. The monthly payments can be used to pay for medical treatment not covered by Medicare, supplement your long term care costs, or provide additional cash for your household. You can also take a lump sum payment to travel, reduce your monthly expenses by paying off your debts or make needed repairs. Beware that the unspent balance from the loan money could put a borrower over the allowable asset limit for Medicaid or Supplemental Security Income (SSI) eligibility.
Pitfalls of a reverse mortgageA reverse mortgage is not for everyone. A reverse mortgage is not recommended for a single person who may soon need nursing home care because the loan will need to be repaid as the person moves out of the house. Likewise, it is not good idea for a couple who are both expected to need nursing home care in the near future. In such event, the house will be sold, converting an exempted asset under the home exemption to cash, an available asset. You will have to deal with this available asset to qualify for Medicaid.
Professional assistance is strongly recommendedUsed wisely, reverse mortgages can be valuable to senior citizens. However, as with all long term care situations, no answer is cut and dry. Reverse mortgages are complicated and awareness of pitfalls can avoid costly mistakes. The AARP website (www.aarp.org) and the federal government's site at hud.gov provide useful information and serve as a good starting point for further exploration. Last but not least, no decision about obtaining a reverse mortgage should be made without first consulting with an elder law attorney, knowledgeable mortgage specialist, or financial planner.