The Virtues of Private Reverse Mortgages
For many years, banks have been touting the advantages of so-called “reverse” mortgages as a way for cash-strapped seniors to tap into the equity in their homes in order to meet expenses, whether simply for day-to-day living or to pay for the increased cost of home care.
The basic concept of a reverse mortgage is that the bank will make payments to the homeowner, rather than the other way around. Payments can be in the form of a single lump sum, a line of credit, or a stream of monthly payments. The loans do not have to be paid back until the homeowner moves out or dies. But the bank does have to be paid back at that time.
For a senior who moves into a nursing home, this means the forced liquidation an asset (the home) that would otherwise be “non-countable” for Medi-Cal purposes, and by so doing suddenly turning home equity into cash proceeds which then become a “countable” asset. The money generated by the forced sale will then disqualify the senior from a Medi-Cal subsidy, at least until it is spent down. In essence, the bank reverse mortgage may ultimately force the home-owner to deplete his or her estate by the cost of extended care.
In addition, because the bank is advancing money without knowing for sure when it will be paid back, there are high up-front costs with reverse mortgages. These mortgages are limited to about half of the equity in the home and this limit may, or may not, meet the homeowner’s needs.
For these reasons, many elder law attorneys advise clients to seek more traditional financing if at all possible, such as a line of credit from a bank.
However there is another alternative that in many instances may better meet the needs and goals of older homeowners – the private reverse mortgage. This is a private loan, usually from a family member, to the homeowner which is secured by a mortgage or deed of trust on the senior’s home.
Here are some of the advantages for the senior homeowner:
It’s cheaper. The upfront costs of paying an attorney to set up a private reverse mortgage are typically much less than the up-front costs of a commercial mortgage.
Interest rates are lower. Interest rate on private reverse mortgages, as set by the IRS each month, are less than the current interest rates on a commercial reverse mortgage.
There is no limit on what percentage of the home equity may be borrowed. The ability to tap into more equity in the home may delay the day of reckoning when the senior must move to a nursing home just because there is not enough money to pay for home caregivers.
The money need not be paid back until the house is sold, so if the senior moves to a nursing home, he or she can still keep the house. By avoiding the “forced sale”, the senior can continue to retain the home as an exempt asset for Medi-Cal purposes.
Once in a nursing home or other facility, the senior can continue to receive payments on the private reverse mortgage, if needed, in order to maintain the house or to pay for extra care in the nursing home – – or even to pay for family members to come visit.
Here are some of the advantages of private reverse mortgages for family members:
What’s good for the parent or grandparent is also good for the entire family. To the extent that the parent or grandparent can save money on bank mortgage costs, the bigger the ultimate estate that will pass to the family.
The ability to tap into more equity in the home can mean that family members who are providing assistance can either alleviate that burden upon themselves by using those funds to pay for caregivers, or pay themselves to provide that care.
While current interest rates are very low, the rates set by the IRS on loans are higher than money markets and certificates of deposit are paying these days. This means that a family member or members advancing the funds can earn a bit more on the private reverse mortgage than they would earn if the money were sitting in a bank CD.
A private reverse mortgage can help protect the equity in the home for the family, because it takes precedence over any claim by Medi-Cal for “payback” following the demise of the senior homeowner.
It can also protect the home equity by facilitating a transfer to family members during the senior’s lifetime in order to avoid Medi-Cal “payback” on his or her death. In contrast, with a bank reverse mortgage, any attempt by the senior to transfer the home to family members would be a breach of the loan terms, and the lender would require an immediate pay-off, which would likely force a sale of the home to pay the lender.
The family of any senior who owns a home, but who has little in savings, should consider the private first mortgage as a way to help parents and grandparents enjoy the retirement they deserve. Of course, the feasibility of this arrangement assumes that the senior’s family can raise sufficient funds to make the loan.