by Jane M. McNamara, Elder Law Attorney
Many well known senior celebrities often tout the benefits of reverse mortgages during their daily TV commercials. The advertisements target those who are at least 62 years old, and have equity in their home. The commercials sound too good to be true, as promises of “cash “ in the form of a single lump sum, a monthly payment, a line of credit, or a combination of these three is available. The loan does not need to be repaid until you sell, move from your home, or die, whichever happens first. The amount received is typically based on age, the value of the home, the equity, interest rates and other factors.
While these loans enable the borrower to tap into the equity in the home without incurring monthly payments, they are expensive in initial and ongoing costs. The costs of the loan include an origination fee, mortgage insurance premiums, closing costs, ongoing servicing fees, continuing interest, etc. The borrower should determine whether there are less expensive options to meet the goals, prior to obtaining a reverse mortgage.
As an Elder Law Attorney, I often see people seeking reverse mortgages to help pay for long-term care in the home. This is a financially dangerous option, as the reverse mortgage contract requires the borrower to live in the home during the course of the loan. If the borrower needs ongoing long-term care outside the home, the loan company can require the loan be paid, and can even foreclose on the house to recoup the balance owed.
Why is this so financially dangerous? Imagine the following: 80 year-old borrower, John, needs a caregiver. He signs up for a reverse mortgage, and is drawing on the funds available. After two years, John has spent $150,000.00 of the available funds, John’s health has declined, and he needs care in a skilled nursing facility. Since John’s monthly income is well-below the average skilled nursing home monthly charge of $8,100.00 per month, he needs financial assistance to pay for care in the nursing home. John applies for Med-Cal to help pay the monthly care costs. The house is considered an “exempt asset” so it doesn’t interfere with his Medi-Cal application.
John moves into the facility, receives care, and the Medi-Cal long-term care benefit system assists substantially with John’s monthly care cost. John only needs to pay his monthly income (less $35.00) to the facility to receive full-time care. Since he no longer lives in the home, he is in violation of the reverse mortgage contract. The reverse mortgage company demands repayment of the $150,000 loan plus fees, interests, and other costs, which of course is impossible. A foreclosure occurs, the house sells quickly, the loan is repaid, and the excess proceeds are paid to John. John receives the funds, however, those funds cause his total “resources” to now exceed the Medi-Cal maximum. He loses his Medi-Cal benefits, and must pay the monthly $8100.00 from the house proceeds until he spends all the money on care, and can then re-apply for Medi-Cal.
Had John considered and pursued other long-term care planning options, he very likely could have avoided a reverse mortgage, still received the needed care, and saved his home. Information about alternative options are critical before making ANY important financial decision, and especially with reverse mortgages. Seeking the advice of an Elder Law Attorney to look at all options given the situation can be extremely valuable, can save assets, and provide assistance and guidance in numerous ways.
For more information about reverse mortgages, AARP has an accurate and helpful information on their website at www.aarp.org. For more information about long-term care, asset protection, and paying for care, please see www.theMcNamaraLawFirm.com or call the McNamara Law Firm, PC at (661) 287-3260.