Money Matters: The virtues of private reverse mortgages for seniors

By Harry S. Margolis The Daily Record Newswire For years banks have been touting the virtues of so-called reverse mortgages as a way for cash-strapped seniors to tap into the equity in their homes to meet expenses, whether 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 makes 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 income. The bank does not have to be paid back until the homeowner moves out or passes away. Drawbacks But the bank must be paid back eventually. For a senior who moves to a nursing home, that means liquidating an asset that is non-countable for MassHealth purposes and turning it into a countable asset that must be spent down. In addition, because the bank is advancing money not knowing for sure when it will be paid back, there are high up-front costs for reverse mortgages as well as continuing mortgage insurance premiums. Furthermore, the Federal Housing Administration's program limits the amount that may be loaned to about half of the equity in the home, which may or may not meet the homeowner's needs. For those reasons, we have always advised clients to seek more traditional financing if at all possible, such as a line of credit from a bank. Private option There is another alternative to the standard reverse mortgage that, in many instances, better meets the needs and goals of older homeowners: the private reverse mortgage. It's a private loan, usually from a family member, to the homeowner that is secured by a mortgage on the senior's house. 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. And there are no ongoing mortgage insurance costs. * Again, it's cheaper. 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 the percentage of the home equity that can 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. * It doesn't have to be paid back until the house is sold, so if a senior moves to a nursing home, she can keep the house. * 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 -- and even to pay for family members to come visit. Here are some of the advantages 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 relieve 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 what money markets and certificates of deposit are paying these days. That means the family member or members advancing the funds will earn a bit more than they would if the money were sitting in the bank. * The private reverse mortgage can help protect the equity in the home since it takes precedence over any claim by MassHealth. Caveats Family members who participate in private reverse mortgages need to be comfortable with giving up access to the funds they advance for a long period of time. It will only add to family stress if those extending the loan need the funds and put pressure on the parent or grandparent to sell the house or find other financing. There also could be some risk for the family members loaning the money. The ultimate proceeds of the sale of the house may be insufficient to pay back the entire amount loaned plus interest. And typically in private transactions, no one obtains title insurance, meaning that the lenders may be at risk if title problems arise. In short, all family members should go into a reverse mortgage transaction (or any intra-family financial arrangement, for that matter) with their eyes open. The family of a 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. However, when no family members or friends can extend a private loan, a commercial reverse mortgage may be the best and only option for a senior homeowner to obtain the resources necessary to continue to live at home and get whatever care he or she may need. ---------- Harry S. Margolis is the managing partner at Margolis & Bloom, an estate, elder law and special needs planning firm with offices in Boston, Dedham, Framingham and Woburn. Published: Tue, Apr 12, 2011