Imagine a home mortgage loan where the mortgage company pays you and your re-payment obligation is deferred until you sell or for the rest of your life. To those of us accustomed to monthly mortgage payments this sounds amazingly good. This is the Reverse Mortgage. It is a powerful and increasingly popular estate planning and financial planning tool. If you are over age 62 and have paid off or mostly paid off your home, you might qualify for a Reverse Mortgage. There are several advantages. In addition to the deferral of your payment obligation, the loan proceeds are not taxable income, there is no deficiency liability if the value of your house becomes less than the loan balance and your family can still (possibly) inherit your home.
However, there are disadvantages too. These loans are higher in cost than traditional loans and, since there are no periodic payments, the loan balance due increases each year. As time goes by, any remaining equity in your home will decrease and may disappear entirely with the result that your home may become unsaleable and your children’s inheritance will be reduced. For low income seniors, the availability of funds from a reverse mortgage might negatively impact eligibility for needs based government programs such as Medicaid or, in Arizona, Arizona Long Term Care. Finally, when you die your family will need move quickly to either sell your home or pay off the reverse mortgage if they want to keep it. If this is not done, the home will be foreclosed upon. This places an extra burden upon family members.
We believe that a reverse mortgage can be a valid estate planning tool. Used as a part of an overall estate plan, a reverse mortgage can provide a stream of tax free cash and eliminate the need to sell other, income producing, assets at an inopportune time. A reverse mortgage can provide extra income to pay for health care and enable a senior to remain at home longer. But this tool needs to be used with caution. It is attractive for lower income seniors who need to supplement their social security income. But in choosing this option, seniors give up other options–such as selling their home and downsizing. Sometimes reducing living costs is the only option that makes sense. In our practice we have encountered seniors who have been supplementing their social security income by using credit cards and income from a reverse mortgage to stay in their homes. We usually meet them when their credit cards are maxed out and the reverse mortgage is almost exhausted. There is little that can be done because there is nothing left to work with other than social security.