Hardly a day goes by that you may not see an ad by a famous movie star, or retired politician on television advertising reverse mortgages. So why would a bank spend significant funds on advertising to “sell money” when they are not getting paid back?
The basic reason is that banks only make money when they sell money. In the current interest rate environment, rates are relatively low on deposits and CDs, so the banks can borrow money from you relatively inexpensively and lend it by way of reverse mortgages and other types of mortgages at much higher rates. A significant benefit with a reverse mortgage is that the owner/borrower basically never has to pay the money back. In the event that a borrower needs funds and does not have sufficient funds to live at home to take care of themselves or pay the expenses of maintaining the home, then it is a relatively straight-forward process to borrow money against the equity in the home. The bank will do an assessment or appraisal on the home, and then based on the borrower’s age, determine how much money the borrower can withdraw from the bank based on the interest rate and amount of principal to be borrowed, also taking into consideration the valuation of the home.
In most cases, the funds do not have to be paid back until the borrower dies, or is permanently institutionalized in a facility for a period of at least six months. A person must also be at least 62 years old in order to obtain the reverse mortgage, and if a person has transferred their property to their children and reserved a life estate or in the alternative, has conveyed the property to an Irrevocable Trust, then it may be a bit more difficult to obtain the reverse mortgage. In the case where the children are also owners on the Deed, they will also have to sign off on the bank loan, although I have been informed that there are several banks who will not permit this since the child does not own the home and is not at least 62 years of age. With an Irrevocable Trust, most banks will not allow the Trust to borrow the money, especially if the owner has the right to use, occupy, and live in the home. In these cases, the bank is concerned that if the person does not wish to move, but in the event they were institutionalized, they may not be able to sign off and waive their life estate if at some time the rest of the family members wish to convey the house.
However, there are significant benefits in accessing the equity in the home. Again, the homeowner does not ever have to pay the money back, and if they are strapped for money, they can easily access the equity by withdrawing it. The amounts that they withdraw are not taxable to them, and to the extent that they are not accumulated by having them added to a bank account, they also are not considered as income or assets when a person needs to access Medicaid eligibility for long-term care expenses.
In 2014, the rules have significantly changed, and a person must be evaluated to determine whether they are able to be approved for a home equity loan based on their income and other assets. This is the so-called “ability to repay” and although this type of loan does not have to be repaid, people must still meet the requirements of an applicant for a loan. More importantly, the banks are concerned as was the Federal Government in instituting these rules, that a person can still pay their homeowner’s insurance, taxes, and other maintenance expenses on an ongoing basis without having to tap the home equity loan as a resource to pay all expenses. If the cap of the mortgage amount is reached, then the person no longer has the ability to withdraw any more funds, and they may have to move if they cannot make the payments, or otherwise, a town or municipality could foreclose the property based on the unpaid taxes which become liens against the property in most jurisdictions
Counseling is important for a person to verify that a reverse mortgage is the best type of loan that is available in time of need, as there are many alternatives that are available that the client’s elder law attorney can discuss with them before making a final decision.