Pros and cons of reverse mortgages

[jklcpa]

We had a recent topic on reverse mortgages that was about the proper handling of an heir's payment of the interest. Many of us have aging parents and clients, so I thought I'd start this discussion with the lists below that I copied from a page on a site called reversemortgageguides dot org.  This should not be considered a complete list, so please add to the discussion as I have done in my next post, especially anyone that has firsthand experience.

Pros of Reverse Mortgages

• Allows the homeowner to stay in the home.
• Can pay off existing mortgages on the home.
• No monthly mortgage payments are required, however the homeowner must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
• The homeowner receives payments on flexible terms:
  • Credit line for emergencies
  • Monthly payments
  • Lump sum distribution
  • Any combination of the above
• A reverse mortgage can not get “upside down” so the heirs will never be personally liable for more than the home is sold for.
• Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
• Loan proceeds are not taxable.
• The interest rate may be lower than traditional mortgages and home equity loans.

Reverse Mortgage Cons

• The fees on a reverse mortgage are the same as a traditional FHA mortgage but are higher than a conventional mortgage because of the insurance cost. The largest costs are FHA mortgage insurance and the origination fee
• The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
• A reverse mortgage loan usually does not affect eligibility for entitlement programs, such as Medicare or Social Security benefits. However, some needs based government benefits such as Medicaid and Supplemental Security Income (SSI) may be affected by a reverse mortgage loan. You should consult a qualified professional to determine if there would be any impact to your government benefits.
• The program is not well understood by most individuals. However, the availability of independent counseling helps.

Edited September 25, 2016 by jklcpa
formatting and clarification

[jklcpa]

Ok, with that being posted, I have a few comments and observations of my own to add and are posted here to keep them separated so no one thinks they came from that website.

Here are some of my thoughts on additional disadvantages:

• An additional requirement is that the homeowner must be at least 62 years of age. This includes a spouse or anyone else that is on the title of the home, so this may preclude some from using these products if the spouse is younger than that or if a child or other person is on the title.  There may be lenders that offer these products for those younger than 62.
• The lender will require that the home is maintained to its satisfaction and may require costly repairs be done. Some examples I've heard of are sidewalk repairs for any cracks or unevenness and damp basement remediation. If the borrower does not have the resources for this, it will have to come from the reverse mortgage proceeds themselves.
• Because there is no income requirement and solely based on the equity of the home, the interest rates +/or fees may be high.  If choosing the monthly payment or line of credit option available with these products, each of those draws usually come with a fee attached to them as well.
• The loan does not have to be repaid as long as the home is the borrower's primary residence. It becomes payable when the borrower sells, moves out, or dies.  Moving out also includes the borrower being placed in a long-term care facility, and that is usually when the family is looking to the remaining resources to fund this person's needs and care.
• Accumulating interest adds to the loan balance.
• Estates or heirs are required to pay off the mortgage so inheritance is reduced.  An heir wishing to keep the family home in a cash poor estate will have to use other funds to do so.

 

Edited September 25, 2016 by jklcpa
formatting

[Catherine]

Any idea how this is handled in the ACA clawback rules that are phasing in?  Where the estate is tapped to recover Medicare costs in the last years of life?  Is the value considered to be pre-reverse-mortgage or post-reverse-mortgage?  That could push the heirs from "we need cash to payoff this loan" to "we need cash to payoff the loan AND pay back medicare for dad's last two years of medical costs - crap, we're in deep doo-doo!"

[jklcpa]

37 minutes ago, Catherine said:

Any idea how this is handled in the ACA clawback rules that are phasing in?  Where the estate is tapped to recover Medicare costs in the last years of life?  Is the value considered to be pre-reverse-mortgage or post-reverse-mortgage?  That could push the heirs from "we need cash to payoff this loan" to "we need cash to payoff the loan AND pay back medicare for dad's last two years of medical costs - crap, we're in deep doo-doo!"

Without research, I would say that this is based on the equity interest in the home, and that is its FMV minus the balance of any outstanding debt secured by the home.