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Aug 2011
01
August 01, 2011

Estate Planning Tip: Reverse Mortgates


Reverse Mortgages

Reverse mortgages can be a good solution to providing the funding that allows an elderly parent to age in the setting they prefer, which for most seniors is their own home.  A reverse mortgage allows an elder to draw on the equity of their home to pay for the assistance they need to stay at home.  The problem is reverse mortgages are very expensive, with loan origination fees that typically equal 2 percent of the first $200,000 of the home’s value and 1 percent of the remaining balance.  Another 2 percent of the home’s value may be charged for the initial mortgage insurance premium.  Other costs such as appraisal fees and title work can easily come to another $1,000 or more.  Some families are in a position to avoid many of these costs.

Private Reverse Mortgages

If one or more of the kids is well off financially, they can lend the parents the funds needed to fund long term care expenses and secure the loan with a reverse mortgage.  This will avoid many of the costs associated with a commercial reverse mortgage.  An attorney can be hired to handle the paperwork at a fraction of the commercial lending charges.  An appraisal is usually a good idea as well so that the kids have a good idea of the amount of security that exists for their loan.  In addition to reduced costs, private reverse mortgages have other advantages.  The interest rate charged on the loan can be lower than the typical commercial loan. As long as the minimum federal rate is charged (as determined by the IRS), there will be no gift tax consequences. 

Commercial reverse mortgages typically require the home to be sold and the loan paid off if the parents leave the home for a period of more than 12 months, as often happens if nursing home care or assisted living is needed.  With a private reverse mortgage, sale of the home remains a family decision.  Also, if a parent’s health deteriorates to the point that nursing home care and Medicaid is needed, a reverse mortgage lien will have priority over any Medicaid lien against the home as long as it is recorded before the parent needs Medicaid.  This can prevent the home from being lost to estate recovery.

Other Considerations

Private reverse mortgages are not for everyone.  The children need to honestly evaluate their finances to make sure they can afford taking on the costs.  A reverse mortgage is essentially an investment in the real estate securing the loan.  The children need to make sure they are comfortable with that investment and its prospects for holding or increasing in value.  Finally, other family members need to be clear that the real estate typically needs to be sold after the parent’s death to pay off the mortgage.  Other children will not be able to inherit the property unless they are able to pay off the mortgage holder.  Clear communication up front can reduce friction and avoid disrupting family peace.
 

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