New York Estate Planning & Elder Law Blog
by Michael Ettinger, Esq.
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), allows seniors, age sixty-two and older, to tap the equity in their homes. The demand for these loans is exploding due to the lingering effects of the recession and the leading edge of the boomer generation reaching retirement age.
The attractiveness of these loans are that no payments are made on the loan until the home is sold, the last owner vacates for assisted living or nursing home care or the last owner dies. After death, the loan repayment terms allow an additional twelve months for estate administration and probate.
The difference between the sale price and the loan goes to the heirs under the will or living trust. If the home sells for less than the loan, the estate owes nothing since these loans are covered by insurance, taken out by the borrower, to repay the lender for any shortfall. While the insurance adds 2% to the cost of the loan, the mortgage insurance fee is tax deductible.
Although about half of reverse mortgages are taken out to pay off existing mortgages, thereby eliminating payments, there are other options besides taking a lump sum. Borrowers may also take out a line of credit or receive a monthly check for a term certain, such as ten or twenty years, or for life. Proceeds are received tax-free. Since the loan is based solely on the equity in the home, there is no income check or credit check required.
The amount that you may borrow depends on your age and the value of the property. For example, maximum loan amounts on a fixed rate mortgage for home values up to $625,500 or more are $324,070 for a sixty-two year old and $384,850 for a seventy-five year old. Homes of lower values receive proportionately less loan amounts.
Due to the high cost of the mortgage repayment insurance (2%) and the loan origination fee (2% of the first $200,000, 1% of amounts over $200,000, with a cap of $6,000), these loans are not recommended where the homeowner may move or sell in a few years or is at risk for long-term care and may need Medicaid planning. Once a reverse mortgage is placed on a home, it is not amenable to being protected from nursing home costs with a Medicaid Asset Protect Trust.
A consultation with an experienced elder law attorney can help you weigh the pros and cons of going forward with a reverse mortgage, as well as available alternatives, such as home equity loans, selling the home and trading down, or opting to rent.