Reverse Mortgages | When is it Appropriate to Consider?

Welcome to another edition of Aging Insight. I'm Lisa Shoalmire and I'm here with my partner, John Ross, and we're elder law attorneys based here in the Ark-La-Tex. The purpose of this program, Aging Insight, is to bring you information about things that help you remain independent, stay in your home, and not be a burden on your family, as we all deal with the challenges and blessings of growing older. John, welcome. Another edition.

Yeah, no. Always great to be here on the show, and we provide such good information. We're able to answer a lot of people's questions. A lot of times, I'll see people out in the community and they'll say, "That was... I watched one of the episodes, and I've been asking myself that exact question." And yet, they got the answer right here.

Today, we're gonna address a very common question that I frequently get. I know you do too, John, and that has to do with dealing with or what is a reverse mortgage, and when is it appropriate to really consider a reverse mortgage as a tool, and how does that fit into our goals in aging and remaining at home and paying for ourselves? That's what I think we're gonna talk about today.

Yeah. Where I usually see this come up is that somebody will come to me and they'll say, "John, we're trying to stay at home. We're having some health problems. We're getting to a point where it's becoming harder to stay there by ourselves, and we could probably use maybe some in-home care. Maybe our retirement funds just didn't stretch as long as we thought we would." I've even had clients say, "John, I just never expected to live this long." Which is a wonderful thing that you're able to live and be healthy. But as those finances start stretching thin, especially when you have long-term care needs, one of the natural questions is "How am I going to pay for this care, especially if what you're looking for is to stay in that home?"

And of course, on television, on the radio, in the mail, all of these different places, you start seeing these commercials with very famous celebrities, all different kinds of things, saying "The financial solution is out there, and it's a reverse mortgage. And it's the best thing since sliced bread." It's the key to success and aging independent, and all of these wonderful things, and yet they don't actually explain what it is, and what the pros and what the cons are. Yeah, we have people all the time, Lisa... People all the time, "John, is this something I should consider?"

Certainly it's a tool in our toolbox, I guess, is the way I like to talk about it. But for a lot of seniors, their biggest asset is that home. Most often, our seniors have purchased that home, they've paid off the mortgage, it's bricks and concrete and wood sitting there. And it's great, it provides you shelter, but you know what? You've got equity sunk into that home, and you can't just get a bank statement and say "How many dollars do I have in this home?" like you can a savings account. But if you think about it, that home very much is an asset that we can look at for our care needs.

Right. Now we're gonna be talking about the details of a reverse mortgage, and whether or not that's the appropriate thing. One thing to keep in mind is while it is a tool, it's not the only tool in the toolbox. A lot of times, particularly when somebody asks me about a reverse mortgage, the first questions I'm gonna be asking are things like "What other sources might be out there? Do you have enough?" I've had folks say, they'll say, "John, I think maybe this reverse mortgage might be a good idea 'cause I can use some of the money out of my home." And I'll say, "What other assets do you have?" And they'll say, "I have an IRA, but I don't wanna touch that because if I pull any money out of that IRA, I have to pay taxes on it. I'm just gonna leave that there, and maybe go with this reverse mortgage." And that may or may not be the right thing. Remember that this is just one tool. And even after you listen to us talk about it, if you think that "That still sounds like a great idea," remember that there may be some other options. You wanna make sure that you explore every possible option before going down this road.

That's right. And because this is one tool, you need to be very informed on what it is. I think what we're gonna do is we're gonna take a break, and then we're gonna come back and get into the details of what a reverse mortgage is, how it works, what things to look out for. We'll see you back here in just a minute.

Hi, I'm John Ross, elder law attorney and board member for the Alzheimer's Alliance. And welcome to Our Place. Our Place is a day program designed to provide rest and relief for the caregivers of people with Alzheimer's and related dementias. Our Place is a safe environment where our friends benefit from socialization in a home-like environment. Alzheimer's is devastating and affects over 17,000 families in our area. To find out how Our Place can benefit you, please visit our website.

Welcome back to Aging Insight. I'm John Ross, and this is Lisa Shoalmire. And today on Aging Insight, we're talking about reverse mortgages. Now neither Lisa nor I are paid spokespeople touting the benefits of reverse mortgages. We're not bankers, we're not celebrities. We're elder law attorneys. And with that in mind, we're trying to give you the pros and the cons. And we started out just mentioning that these are pretty common questions that we get, but a lot of times people don't actually understand what that reverse mortgage is. And in its simplest terms, all a reverse mortgage is, is a type of loan. Just like when you maybe originally purchased that home, you didn't have enough money to pay the full price of the house, so you went to a bank, the bank loaned you some money. You used that money to buy a house. And then over time, you make payments to the bank, and eventually you pay that loan off. A reverse mortgage is still a mortgage. It's still just like that, except in this case, the home is already paid off. And what this loan is, is they're giving you a loan based on the value of that house. But the kicker here is that while you're alive, there's no payments due, or at least in most cases, there's no payments due. Again, the first thing is, this is a loan. It's not free money.

Right. And you have to be 62 years or older in order to look into, apply for, and receive a reverse mortgage. This isn't a tool for younger folks. The other part of receiving that reverse mortgage is essentially, you are receiving payments based on the value of the equity that you have in your home. If you own a home worth $80,000, the bank... You may have terms of your reverse mortgage where the bank is sending you $600 a month or $1,200 a month. But the bank keeps a tab, and essentially, your loan gets bigger every month because they're sending you an additional check every month.

There's one type of reverse mortgage where you receive those payments on a monthly basis from the bank for a particular set of years. Maybe it's five years, maybe it's eight years, but you are receiving a monthly payment from the bank. Another type of reverse mortgage is called a "tenure loan", and that is where that the bank sends you money a little bit every month for the rest of your life. But again, remember, every payment you get is running up your tab at the bank. Some day, the bank expects to get paid back. And then I guess the third type of loan is the type of loan where you take a lump sum or a larger loan out all at one time, very similar to just an equity loan.

Right. And with your example, Lisa, where you have a home worth 80,000, most of these are based on the idea that the bank is gonna lend you some percentage of the value. For example, on an $80,000 house, the bank might be willing to lend up to 50,000 or up to 60,000. The reason they're not giving you the full amount, the reason they're not lending you a full 80,000 is because the way this loan works. Again if you remember when you had that original mortgage, and every time you made that payment, part of the payment was principal, meaning that that's the part that actually goes towards the price of the house. But then there was another part of it, and that other part of it was interest. And this is where the banks make money. They charge interest on that loan. The same thing applies to a reverse mortgage. The difference here is, is that you're not making any payments.

Let's say you did like the one Lisa talked about where you're gonna get $1,000 a month for some period of years, when you get that first $1,000, you owe the bank $1,000. But by the end of that first month, that loan of $1,000 has accrued a little bit of interest. Even if you wanted to pay the mortgage off at the end of that first month, it wouldn't be as simple as just giving them back $1,000. There's some interest on that. You might have to give them back a $1,015 or $1,005 or something like that, depending on what the interest rate is.

Now here's the kicker. In a regular mortgage where you buy a house and you make payments to the bank, each year, you're paying that off. And the amount of interest that is building starts getting smaller because you're making payments. With a reverse mortgage, the amount you owe gets bigger and bigger and bigger. And since you're not making payments on that, the interest starts accruing. And in financial terms, you get something called "compounding interest". And what that is in its simplest terms is when you get that first payment, you owe interest on the payment. But the next month, that payment has... There's some interest on it. And the next month, you get another payment. And now you're getting charged interest on top of interest. And it gets bigger and bigger. And in fact, it can get a lot bigger a lot faster than what a lot of people realize.

Yeah. And that's right. And typically, interest rates on a reverse mortgage are adjustable. Very rarely do you see set interest rates on a reverse mortgage. That means that the bank... Your interest, while interest rates might be low right now, next year, if we have economic issues and interest rates tick up, then your interest on your reverse mortgage is gonna go up as well.

Yeah. Now although it is accruing interest, that part is true, but one statement that they always talk about in the advertisements is that the payment that you're receiving is tax-free. Yeah it's true, but of course if you think about it, this is your money. [chuckle] If it wasn't a house, if this was a savings account that had 80,000 in it, and you went and pulled $100 out of that savings account, of course you don't pay interest when you take money out of your own account. And the same thing applies with a reverse mortgage. When the bank is lending you money off of the equity in your own home, yeah, there's no taxes on that. But that's not really a benefit, at least not the way I see it. And again, I mentioned a lot of times, people will avoid using savings because they think, "By using the reverse mortgage, I'm getting tax-free money." It's not that you're getting tax-free money, you're just getting some of your money changed from a house into cash.

Yes, but one thing to keep in mind is that money that you're getting is very expensive. And what I mean by that is once again, just like when you got that original mortgage on the home, a reverse mortgage carries lots and lots of bank fees, origination fees, and costs that are upfront. And of course, they'll always helpfully tell you that they will charge that back to your reverse mortgage, and so maybe you don't even really notice the cost. But we've already got expenses built in, so the cost of a reverse mortgage is something to look at and to really evaluate if that's the tool to use for meeting those care needs that you may have or those income needs that you have in retirement.

Yeah. And I think a lot of people don't necessarily realize that you go through this whole process of obtaining the reverse mortgage, and before you even receive the first payment, you already have a debt. All of those closing costs, which in some cases can be thousands of dollars. Before you've ever gotten the first payment, there's already an amount due of $5,000, $6,000, $8,000, $10,000 before you've even gotten that first little piece. And yeah, that can be a surprise for a lot of people.

Yeah, that's right. And because of all that, they've really instituted some disclosure rules about making sure that every borrower, that the fees and all are disclosed upfront. But that paperwork can be very overwhelming, so...

Yeah, that's right. There's also some unintended consequences with reverse mortgages. And sometimes, even if it's the right thing to do, if you're planning for today and you're not looking down the road as to what might happen in the future, some of those unintended consequences can sneak up and bite you. We're gonna talk about those when we come back here in just a second.

Welcome back to another edition of Aging Insight. I'm Lisa Shoalmire and I'm here with my partner, John Ross. And today we've been talking about a hot topic among seniors, which is a reverse mortgage. And a reverse mortgage is a tool that can allow you to tap the equity savings that you have in your home in order to meet unexpected medical expenses, or perhaps to pay for in-home care, sitters, and things that you may need in order to stay in your home. There is... It's certainly something to look at, but we've been talking about the mechanics of how that mortgage works and what to be on the lookout for. And now, John, before the break, you told us that there are some hidden dangers...

You've decided, "You know what? A reverse mortgage sounds great. I need some funds because my health is not very good, I'm needing some help around the house." And at $15 an hour, that's just a lot to have to pay somebody to come in. Maybe you don't have enough resources to pay for all of that. And so you think, "A reverse mortgage might be a good idea. It gets me some money coming in that I can use to pay for that care," and you don't have to pay it back. This can be a... It sounds great. And so maybe you get the reverse mortgage. You start getting some of those payments in. You're using that money to pay for those in-home care providers, but then one day, despite all your best efforts, you fall in the home and break a hip or have a head injury because of that fall, and you find out that your medical needs are now so much, that being at home is just not an option anymore. And now you're having to go maybe to a nursing home. You're not living in the home anymore. Here we go, Lisa, we've got a house, but nobody's living in it.

Right. And the way that reverse mortgages work, they don't require any payments to pay off that reverse mortgage while you're living in the home. And those loans do permit a temporary absence from the home. If you do have to go to rehabilitation, hospital stay, reverse mortgages usually have a provision that you can be away from the home for medical purposes for so many months, but once you reach that endpoint, they start wanting to collect their money back because you haven't returned home.

That's right. In many cases, oftentimes, we've seen 'em where if you've been out of the home for say, 12 months, all of a sudden, that note becomes due and payable right then, even though you're still alive. And maybe you do wanna go back to that house, but you have needed more than 12 months' worth of care. Maybe you had a child who was living with you and is still occupying that house while you're in the nursing home, and now, all of a sudden, this note has become due and payable, and there may not be any resources to pay for it, especially if maybe you've qualified for Medicaid to pay for that nursing home, and all of your income is going to the nursing home. And now, all of a sudden, the note becomes due, and the bank is saying "We want our money," and there's just no money to pay it. There can be some unintended consequences like that. And of course, the other part about this is when you die...

That's right. They...

The note comes due.

The note comes due. And a lot of times, the home, again, since it is typically one of your larger assets, is often the asset that people are thinking about passing on as their legacy to their families. Of course, a reverse mortgage is going to lessen that asset that you're passing on to your children. Either that home is gonna have to be sold in order to pay off that reverse mortgage, or your heirs are gonna have to come up with the amount to extinguish that loan if they would like to hold on to the house.

Some that are guaranteed by the federal government; and some that are not, some that are just private. The ones that are guaranteed by the federal government have a number of rules about how much can be lent, what the survivor's rights are as far as how quickly they have to pay all of that off; but there's been lot of news recently that some of the lenders are not following those rules. The other part about this is, if you decide to go down that road, make sure you know your rights. Make sure... Not just you, but get the family involved in this decision so that when you die, and the kids or whoever are having to deal with this reverse mortgage, they need to know and need to be a part of it, and understand what their obligations are, and how do they deal with that mortgage that you have left behind.

Yeah. And we started this program talking about reverse mortgages as one of the tools in the toolbox. And from my experience, I have seen this tool be a wonderful help to a couple as they've stayed in their home and gotten the care that they needed in their home, and they were able to do that because they could access the equity. I've also seen the other side of the coin, where a person took out a reverse mortgage, simply did not understand all the ramifications and costs, and what it was gonna mean to their heirs when they took out that mortgage. And so I've seen heirs and beneficiaries really have a lot of trouble trying to extinguish that loan and deal with it. It's a...

Yeah, it's a tool in the toolbox, but I'll tell you, it's pretty deep in that toolbox. There's a lot of other tools. And of course...

And it's not the first one I reach for. [chuckle]

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Goodbye.