How Reverse Mortgages Work

Mortgages can be reversed which can be another method through which a homeowner may borrow money against his/her property without having to move out. The standard type of reverse mortgage is known as the Home Equity Conversion Mortgage (HECM). In presenting a lump sum, monthly payments, or a line of credit with federal insurance, HECM is a way that homeowners can get cash currently. The loan doesn’t start accumulating its repayment till the homeowner moves out, sells the house, or dies.

That is perhaps one of the biggest advantages in having a reverse mortgage the way the cash can be used is unconditional. Homeowners may use the proceeds for the following:

- Paid in-home care using private caregivers

- Paying month-to-month expenses

- Payer modification needs that provide safety in the home

- Funding of assisted living

Using Reverse Mortgages for Assisted Living

Even though there are certain stipulations on the reverse mortgage especially regarding living in a nursing home they are helpful. In addition, reverse mortgages also have some requirements – for example, applicants must live in the house, or at least one of them must. In fact, if you move into one of these premises — such as assisted living facility or nursing home — and live there more than the next twelve months, then your reverse mortgage is considered to be in default.

This is why if you are using reverse mortgage to leverage to finainen assisted living you will need at least one co borrower to live in the home. This rule can complicate matters for couples where one partner requires immediate care while the other stays behind.

Couples are usually advised to have both spouses sign the reverse mortgage contract to ensure that if one of the spouses enters assisted living, the remaining spouse can continue to access the funds from the reverse mortgage and remain in the house. If both spouses leave the home to enter a care facility, then it can constitute a repayments event under the conditions of the loan.

Financial Considerations

Reverse mortgages have relatively high costs compared to other types of loans. Most borrowers are charged a fee that ranges from 2% to 8% of the loan amount. Because these costs are added onto the loan amount, although no upfront payment is required, over time, the interest will accrue.

In using a reverse mortgage as the funding for assisted living, one will want to consider:

- The total equity in the home

- The cost projection for the assisted living

- The consequences for their estate and heirs

This is best enhanced by having a consultation with a financial advisor or elder law attorney who specializes in this area; they will be able to show how such a mortgage fits into the bigger picture of retirement and estate planning.

Alternatives and Considerations

If the move to an assisted living facility seems inevitable, there is every reason to consider options other than a reverse mortgage. One could sell or rent out their home to immediately free up money without any consequences regarding repayment with a reverse mortgage.

But first and foremost, homeowners need to be considering how using a reverse mortgage might affect an individual’s Medicaid eligibility, or any other assistance programs intended to defray the costs for long-term care. For example, spending the funds from the reverse mortgage on nursing compensation blurs the analyses of Medicaid eligibility issues among family caregivers.

Conclusion

A reverse mortgage is exactly that; a financial instrument that will enable a senior to finance assisted living. But residency requirements, and potential impacts on estate planning, are two important issues that must be weighed judiciously. Once those factors are understood, with the proper professional counsel, a homeowner can make an educated decision that best meets their financial needs and long-term care goals.