Reverse Mortgage and Credit Line Landmines
[Below is a reprint of a previously published article, but the situation keeps coming up, especially in these tougher economic times for seniors. While a reverse mortgage and line of credit can provide a temporary, short-term solution to a financial crunch, it could cause you and your family to lose much more should long term care be needed because it takes a multitude of Medicaid Planning options off the table.]
Getting older isn’t always fun, and sometimes the “golden years” are appropriately named because it costs a lot more “gold” just to get by. Sometimes seniors find themselves not having enough income or resources to address care needs, help around the house, or even to maintain a standard of living they are accustomed to. When that happens, there is no shortage of reverse mortgage and home equity credit line offers available.
There are landmines seniors are sometimes not aware of when they enter reverse mortgage and home equity line of credit arrangements. This is critically true when it comes to long term care needs. I often have families come to me to discuss long term care needs months or even years after a senior starts needing assistance at home. To fund home health aides, companion care, or just to hire someone to do housework the senior is no longer able to do on their own, they’ll deplete savings and then move on to a reverse mortgage or line of credit. Before long, $40,000 to $60,000 or more has been taken out of a $400,000 house and spent on care. Now the senior may need around the clock care that is best provided in a facility, and the family suddenly realizes that the $1,500 to $2,000 or so a month being spent on care will jump to $8,000-$9,000 or more a month.
And now the family is scrambling to preserve as much in family assets possible while getting their loved one the care they need. Unfortunately, the outstanding loan balance on the family home will greatly complicate matters.
One technique for planning ahead is to transfer the house into an Irrevocable Property Trust five years before applying for Medicaid to handle the nursing home bills. The house is transferred into the trust, and the clock starts ticking. Once five years and month have passed, the transfer of the house no longer needs to be disclosed when applying for Medicaid because only transfers “within the past five years” count. However, the terms of reverse mortgages and home equity lines of credit forbid these types of transfers without paying the loan back first. No, there is no easy way to get around this. Believe me, we’ve looked. There is one possible option, and that is getting a private lender to pay off the reverse mortgage or line of credit and then they take a lien against the house with interest. However, I have only found one such lender who is open to it, and it is not a bank or financial institution. So the family now had to come up with the $60,000 to pay off the loan just to move the house.
What if you don’t have five years? Then it becomes even more tricky. There is a way for a family member to buy a portion of the house to make it unavailable under Medicaid’s rules. It’s actually a pretty good emergency technique that can save the family home and even other real estate from a Medicaid lien or from having to be sold and the proceeds wholly spent. But, again, the senior cannot sell even a small portion of the real estate without paying off that outstanding loan. It is not uncommon for families to have to liquidate everything else the senior had, or even pitch in some money of their own, to pay back the loan in order to save the hundreds of thousands of dollars in home equity from being completely lost to a nursing home.
So when are reverse mortgages or home equity lines of credit a potential solution to the problem?
You always need to be careful about the fine print. With a reverse mortgage, you should probably approach the transaction with the attitude that the house will disappear once you have passed on. Yes, there are often provisions about the family having a right to purchase the house at fair market value at death and paying off the mortgage balance to keep the house, but there are many times that is not financially realistic. If the reverse mortgage terms otherwise look good, just mentally be prepared that the house will not remain in the family because that has a good chance of being the case. If you are OK with that, then a reverse mortgage may be a solution to your problem.
For lines of credit, some seniors will use it more for large, non-recurring, unexpected but necessary expenses such as needing a new roof on the house or to help a family member with an emergency. In these situations, it is best to check the interest rate and terms to see if it really is something that can be afforded. This should also be coupled with a plan and monthly budget to pay off the line of credit over time to make sure it is really treated as a loan to be paid back rather than just spending cash from an account.
When choosing between the two types of loans, smaller, more regular sums of money coming out are more in the realm of reverse mortgages. In contrast, a few larger, non-repeating money needs are sometimes met through a home equity line of credit. But in all cases, you should look at the potential future impact of these loans on long term care strategies before making your decision.
For more information on Medicaid Planning or other care assistance solutions, please contact Mr. Marsocci through his office at The Care Assistance Center, LLC at 919-518-8237 or visit us on the web at www.CareAssistanceCenter.com.