The basic concept of a reverse mortgage is that the bank will make 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 payments. The bank does not have to be paid back until the homeowner moves out or passes away.
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 Medicaid purposes and turning it into a countable asset that must be spent down before the former homeowner can qualify for Medicaid coverage.
In addition, because the bank is advancing money without knowing for sure when it will be paid back, there are high upfront costs to reverse mortgages. These mortgages are limited to about half of the equity in the home, which may not meet the homeowner’s needs.
There is an alternative 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.
Advantages for the senior homeowner:
• It is cheaper. The upfront costs of paying an attorney to set up a private reverse mortgage may be a small fraction of the cost of a commercial reverse mortgage.
• Interest rates are lower. The interest rate on a private reverse mortgage is set by the IRS each month and is less than the interest rate on a commercial reverse mortgage.
• There’s no limit on what percentage of the home equity may be borrowed. The ability to tap into more equity in the home can delay the day of reckoning when the senior must move to a nursing home just because there is not enough money to pay for caregivers.
• The loan need not be paid back until the house is sold, so if a senior moves to a nursing home, he can keep his house.
• Once in a nursing home or other facility, the senior can continue to receive payments on the private reverse mortgage if needed to maintain the house or pay for extra care in the nursing home.
Advantages for family members:
• What is good for a parent or grandparent is good for the entire family. To the extent the senior can save money in mortgage costs, the bigger the ultimate estate that will pass to the family.
• The ability to tap into equity in the home can mean that family members who are providing assistance can either alleviate the burden by hiring more paid caregivers or be paid themselves for providing care.
• While current interest rates are very low, the rates set by the IRS are higher than money markets and certificates of deposit are paying these days. This means that the family member or members advancing the funds will earn a little more than they would if the money were sitting in the bank.
• A private reverse mortgage can help protect the equity in the home because it takes precedence over any claim by Medicaid.
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.