Reverse mortgages are non-recourse loans in which the lender provides funds for the homeowner’s use now, but unlike a conventional mortgage, the loan doesn’t have to be repaid until the homeowner dies or vacates the premises. At that point, the property is sold and the loan is repaid along with the deferred costs and points. AARP has an excellent, easy-to-understand booklet about the pros and cons of reverse mortgages. And this link can help you sample some calculations to see the costs of borrowing and the amounts available in different regions of the country at different ages for the borrower. Any existing loan needs to be paid off with the reverse mortgage proceeds, because these loans need to be in the first position. The federal government insures the homeowner/borrower against the risk that the lender goes out of business, and insures the lender against the risk that the property loses so much value that at the time for payoff, the proceeds of sale are inadequate.
If you run through some sample calculations you will see that the older the homeowner is, the higher the amount that can be borrowed (as a percentage of the equity). If the home has a small value and the homeowner is in his early 70’s with little in the way of savings, borrowing the equity could leave the homeowner with a very thin margin of equity as a cushion. The cost of reverse mortgages is clearly higher than the cost of a conventional home equity line of credit or mortgage. The problem is that those loans are underwritten based on the borrower’s income. So they are often not available for elderly borrowers on limited fixed incomes.
For a homeowner who needs care at home and is running out of money, a combination of Medicaid benefits and reverse mortgage can stretch the available dollars and may provide greater protection than just the loan itself – enabling the person to remain home longer.
Careful planning requires advance consideration of all of the available sources for payment and services. Call us for legal advice on elder care planning …. 732-382-6070