Q. My mother-in-law, Rita, owns a home in Vienna that is valued at $675,000 and the amount owed on her mortgage is still around $300,000. When she retires next year, the monthly mortgage payment will be unaffordable for her, but she would still like to remain in her home. She watches lots of late night television, and ever since she saw Fonzie from Happy Days peddling reverse mortgages, she is convinced that she should refinance her current conventional mortgage to turn it into a reverse mortgage.
Over the years, I have heard so many negative reports about reverse mortgages that I don’t think she should get one. Also, Rita had a stroke last year, and hasn’t quite recovered. If she needs nursing home care one day, won’t a reverse mortgage now cause a problem with getting her eligible for Medicaid later?
A. For senior homeowners who prefer to age-in-place, a reverse mortgage is an option to make staying in the home more affordable. A reverse mortgage, or Home Equity Conversion Mortgage (HECM) is a special type of home loan that lets you convert a portion of the equity from your home into cash. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the loan until the borrowers die or move out (such as to a nursing home) or sell the property.
Following years of negative reports that focused on the downsides of the industry, attitudes are strongly changing about Reverse Mortgages. And the laws surrounding first mortgages have changed significantly also in recent years, to make them much better for consumers. In fact, I frequently recommend reverse mortgage is to my clients for a variety of reasons, and recent surveys have found that 14% of retirees are seriously considering them.
According to a recent NY Times article, millions of Americans will not have enough money to retire comfortably — or at all — in the coming decades. Why? Pensions are now 401(k)s and have far fewer benefits and much greater risk. In addition, according to a Federal Reserve survey of people whose employers offer a retirement plan (and who don’t take advantage of it), nearly a third of them don’t participate because they say they “cannot afford to save any money.” Other participants claim that they are either “too confused by their choices,”“not eligible to participate,” or “have never gotten around to signing up.” Without savings or a retirement plan in place, home equity has become an increasingly important asset to consider tapping into, thus making reverse mortgages an option worth serious consideration for many people over the age of 62.
Experts say that “reverse mortgages may be the retirement answer during the modern era.” Here are some reasons why:
Reverse Mortgage Considerations and New Rules
With a reverse mortgage, there are new rules in place to ensure that you keep up with home maintenance, taxes, and insurance. The lender keeps a running tab of the interest and fees, and once you sell the property, move to a nursing home, or die,the bank is entitled to be paid back the money the bank originally loaned, plus accrued interest. This is typically done by selling the house after your death, or your heirs have the option to keep the house and write a check to Pay off the outstanding mortgage balance.
Reverse mortgages are complicated, and things have sometimes gotten messy for borrowers with surviving spouses or heirs who hoped to inherit the home. Federal regulators have tried to fix many of the problems in recent years, and in May, the Federal Housing Administration announced another attempt to strengthen the program.
The proposed rule (published last month) will reinforce changes that have already been made and add new consumer protections to make certain senior borrowers are sustained in their homes. These new changes would:
•Make certain that required HECM counseling occurs before a mortgage contract is signed;
•Require lenders to fully disclose all HECM loan features;
•Cap lifetime interest rate increases on HECM Adjustable Rate Mortgages (ARMs) to five percent.
•Reduce the cap on annual interest rate increases on HECM ARMs from two percent to one percent;
•Require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on, or a Deed-in-Lieu (DIL) is executed rather than until when the mortgage contract is terminated;
•Include utility payments in the property charge assessment; and
•Create a “cash for keys” program to encourage borrowers’ heirs to complete a DIL and gracefully exit the property versus enduring a lengthy foreclosure process.
These new mortgage rules and previous changes help resolve some of the previous pitfalls that were associated with HECM loans, helping them regain popularity. For instance, borrowers need to seek third-party credit counseling prior to taking out the loan, and they have to demonstrate that they can manage home upkeep and pay property taxes and insurance.
Your mother can learn more about Reverse Mortgages by reviewing educational materials from the Department of Housing and Urban Development, the National Council on Aging and the Consumer Financial Protection Bureau.
Reverse Mortgages and Medicaid Eligibility
You asked about reverse mortgages and how they affect Medicaid Eligibility. As a general rule, I reverse mortgage does not affect Medicaid eligibility. Keeping money in a reverse mortgage line of credit in Virginia, and in most other states, does NOT count as a resource for Medicaid eligibility purposes so long as the house itself is an exempt resource, which it would be for your mother as long as she is living in the home and receiving home-based Medicaid services.
However, transferring money from the reverse mortgage line of credit to a bank account and leaving it there past the end of the month would convert the exempt home equity into a countable resource and that could make her lose her Medicaid eligibility. The important distinction between countable resources and exempt assets is quite complicated.
Reverse Mortgages and your Living Trust Plus(TM)
If you are one of our Living Trust Plus(TM) clients, or considering establishing a Living Trust Plus(TM) income only trust, it will come is very good news to you that you can obtain a reverse mortgage even though your house is titled inside of your Living Trust Plus(TM) income only trust. There are very complex rules for this, and there is only one lender in the country that I am aware of that offers this service, but they have a location in Virginia and I work with them regularly to help many of my clients establish reverse mortgage is inside their Living Trust Plus(TM) income only trust.
As always, if you or your loved one is facing the possible need for long-term care, you should get an opinion from a Certified Elder Law Attorney such as myself. Please call to make an appointment for an initial consultation:
Fairfax Medicaid Planning: 703-691-1888
Fredericksburg Medicaid Planning: 540-479-1435
Rockville Medicaid Planning: 301-519-8041
DC Medicaid Planning: 202-587-2797
About Evan H Farr, CELA, CAP
