Marketing of Reverse Mortgages Lacks Adequate Consumer Protections, GAO Warns
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Banks have been touting the advantages of so-called "reverse" mortgages for many years as a way for cash-strapped seniors to tap into the equity in their homes to meet their expenses, whether simply for day-to-day living or to pay for the increased costs of home care.
The basic concept of a reverse mortgage is that the bank will make payments to the homeowner, rather than the other way around. The payments can be a single lump-sum, a line of credit, or a stream of monthly payments. The bank does not have to be paid back until the homeowner moves out or passes away.
But the bank must be paid back at that time. For a senior who moves to a nursing home, this means liquidating an asset that is non-countable for Medicaid purposes and turning it into a countable asset that must be spent down before the former homeowner can qualify for Medicaid coverage.
In addition, because the bank is advancing money without knowing for sure when it will be paid back, there are high upfront costs to reverse mortgages. And these mortgages are limited to about half of the equity in the home, which may or may not meet the homeowner's needs.
For these reasons, many elder law attorneys advise clients to seek out more traditional financing if at all possible, such as a line of credit from a bank.
However, there is another alternative that in many instances better meets the needs and goals of older homeowners -- the private reverse mortgage. This is a private loan, usually from a family member, to the homeowner secured by a mortgage on the senior's home.
Here are some of the advantages for the senior homeowner:
Here are some of the advantages of private reverse mortgages for family members:
The family of any senior who owns a home but who has little in savings should consider the private reverse mortgage as a way to help parents and grandparents have the retirement they deserve. Contact your elder law attorney for more information.