Banks have been touting the virtues of so-called "reverse" mortgages for many years as a way for cash-strapped seniors to tap into the equity in their homes to meet their expenses, whether simply for day-to-day living or to pay for the increased costs of home care.
The basic concept of a "reverse" mortgage is that the bank makes payments to the homeowner, rather than the other way around. The payments can be a single lump-sum, a line of credit, or a stream of monthly income. The bank does not have to be paid back until the homeowner moves out or passes away.
Drawbacks of a Reverse Mortgage
But the bank must be paid back at that time. For a senior who moves to a nursing home, this means liquidating an asset that is non-countable for MassHealth purposes and turning it into a countable asset which must be spent down. In addition, because the bank is advancing money not knowing for sure when it will be paid back, there are high up-front costs to reverse mortgages as well as continuing mortgage insurance premiums. In addition, the Federal Housing Administration's program limits the amount that may be loaned to about half of the equity in the home, which may or may not meet the homeowners needs.
For these reasons, we have always advised clients to seek out more traditional financing if at all possible, such as a line of credit from a bank.
The Private Option
There is another alternative to the standard reverse mortgage that in many instances better meets the needs and goals of older homeowners – the private reverse mortgage. This is a private loan, usually from a family member, to the homeowner secured by a mortgage on the senior's home.
Here are some of the advantages for the senior homeowner:
Here are some of the advantages for family members:
Family members who participate in private reverse mortgages need to be comfortable with giving up access to the funds in advance for a long period of time. It will only add to family stress if the family member or members extending the loan need the funds and put pressure on their parent or grandparent to sell the house or find other financing.
In addition, there could be some risk for the family members loaning money. The ultimate proceeds of the sale of the house may be insufficient to pay back the entire amount loaned plus interest. And typically, in private transactions, no one obtains title insurance, meaning that the lenders may be at risk if title problems arise.
In short, all family members should go into a reverse mortgage transaction (or any intrafamily financial arrangement, for that matter) with their eyes open.
The family of any senior who owns a home but who has little in savings should consider the private reverse mortgage as a way to help parents and grandparents have the retirement they deserve. However, when no family members or friends can extend a private loan, a commercial reverse mortgage may be the best and only option for a senior homeowner to obtain the resources necessary to continue to live at home and get whatever care he or she may need.