Pros and cons of reverse mortgages
Although each state differs in the fine print,
untapped equity in the home is not considered an asset in determining Medicaid
eligibility, as long as it's owner-occupied. Recent federal legislation placed
the home exemption ceiling at $500,000.
For a homeowner with property worth more, there's
definitely an argument for obtaining a reverse mortgage and then spending down
the cash. But that cash is also subject to Medicaid's new time limitations on
asset reduction. Talk to an eligibility specialist early in the process to see
where you stand.
Additionally, according to Basich, the terms
of many reverse mortgages knock homeowners out of their homes after a period of
absence, which varies from lender to lender. He says some reverse mortgages require
the full loan balance plus accrued interest be repaid when the house is vacated
by the owner for a specified period of time -- like a prolonged, but temporary,
nursing home visit.
"Can you imagine if you have nowhere
to go to?" Basich says. "What incentive do you have to get better?"
of an advocate
Eric Tyson, author of "Mortgages for Dummies"
and other books about personal finance, tends to see reverse mortgages as valuable
retirement tools when homeowners understand them.
financial counselor, Tyson says counseling -- mandatory before entering into a
reverse mortgage -- educates seniors to which lenders are reputable and which
"They should take their time, do their homework,
do some reading about the topic," he says. "There's a lot of jargon
and lingo they should get down."
He agrees fees associated
with reverse mortgages run high. "That's usually the light-bulb moment for
prospective borrowers," he says.
But, he adds, traditional
30-year mortgages also come with high price tags. Older people can find it more
difficult to qualify for a mortgage since many retirees no longer work and have
limited incomes. "People lose homes all the time when they default on their
mortgage," Tyson says.
The majority of Americans rely
on Social Security for their retirement. Problem is, there's often little to supplement
Social Security -- except the home.
"What are you going
to do with that equity? You can't take it with you," he says.
all the options
George Downey, past chairman of the Massachusetts
Mortgage Bankers Association, says reverse mortgage are wonderful when used properly,
but shouldn't be considered a financial panacea.
first take-away should be that every case is different and should be determined
on a case-by-case basis," Downey says. Reverse mortgages make sense for some,
but for others, there may be better solutions than tapping into home equity.
says before committing to a reverse mortgage, take a look at other services available
in the community. For instance, if a senior suddenly needs a lump sum amount to
replace his home's heating system, home equity should not be the first resource
to consider. Many power companies offer low-cost financing for heat, air conditioning
and energy conservation improvements. And the local branch of the National
Council on Aging is a great resource for other senior programs.