The Virtues of Private Reverse Mortgages

Banks have been touting the advantages 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 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. And these mortgages are limited to about half of the equity in the home, which may or may not meet the homeowner's needs.

For these reasons, many elder law attorneys advise clients to seek out more traditional financing if at all possible, such as a line of credit from a bank.

However, there is another 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.

Here are some of the advantages for the senior homeowner:

• It's cheaper. The upfront costs of paying an attorney to set up a private reverse mortgage may be as little as 10 percent 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's 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, she can keep her 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 to pay for extra care in the nursing home -- even to pay for family members to come visit.

Here are some of the advantages of private reverse mortgages for family members:

• What's 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 more 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 bit 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 have the retirement they deserve. Contact your elder law attorney for more information.