New York Estate Planning & Elder Law Blog
Most of us have either seen a commercial or heard someone mention reverse mortgage. While some people have been left with the notion that this is a way that elderly individuals “lose” their homes, other people have heard that reverse mortgages can play a valuable role in estate planning. Even though reverse mortgages are difficult to understand, this article briefly examines the role of these mortgages.
How Reverse Mortgages Work
On its simplest terms, reverse mortgages involve taking a loan out against the equity in a person’s home. Proceeds from the loan can be received either monthly in a lump sum. A person is then charged interest on what they owe. An individual must be 62 years old to qualify for a reverse mortgage and must reside in their home. Even though a person receives payment from a reverse mortgage, the individual must continue to pay real estate taxes, insurance, and homeowner association dues. The lending institution will then collect on the debt when the borrower dies or moves out of their residence.
The Advantages of Reverse Mortgages
There are several advantages to using reverse mortgages as part of your estate plan, which include:
- A person can use the money received from a reverse mortgage for virtually anything. These assets can even be used to purchase life or long term care insurance. This way, in case the individual needs to go to a nursing home later on in life, the long term care insurance can pay for the costs.
- Many children do not care about inheriting a home. Instead, assets from a reverse mortgage can be used to purchase life insurance, whose proceeds can then pass on to your beneficiaries.
- If a borrower passes away owing more on a reverse mortgage than there is in equity, the borrower’s estate is not responsible for paying off this deficiency.
The Downside to Using a Reverse Mortgage
There are several disadvantages of reverse mortgages, which include:
- If a property owner is already receiving government assistance, the receipt of assets from a reverse mortgage could negatively affect these benefits.
- Banks will collect on a loan when the last owner moves out or passes away. There are several limitations involved with this. One, if there is anything left on a line of credit at the time the person enters a nursing home, the line of credit cannot be kept open. If a borrower has a lot of spare money due to the proceeds, there is a risk that the individual might not qualify for Medicaid assistance any longer. Additionally, if proceeds from a reverse mortgage are spent and there is no longer any money for a nursing home, the bank might take the home and the borrower would not receive any proceeds.
Speak with an Experienced Estate Planning Lawyer
The estate planning process is complex, but an estate planning attorney can make navigating this process much easier. Contact Ettinger Estate Planning today to schedule a free case evaluation.