Medicaid Rules and Reverse Mortgages

Many seniors are pitched the benefits of a "reverse mortgage" as a way to "unlock" the equity in their homes and pay for a better lifestyle. Does this make any sense? In what circumstances? What if one spouse needs to move into a nursing home? Let's take a look...

With a conventional mortgage, you borrow a lump sum of money from a bank or mortgage company and each month you partially repay the loan by writing them a check. Thus, you must set aside cash flow every month to make sure you can make that payment. If you fall behind, you may find your house being foreclosed on by the bank.

With a "reverse mortgage," however, you receive a check each month from the bank or mortgage company, and you never have to pay them back as long as you live in the house. If the loan is made to a married couple, then no repayment need be made until neither spouse is living in the home.

At that time, the loan is repaid, plus interest. If the family members cannot pay the loan off, the house will be sold. Note, however, that if the amount of the loan exceeds the net proceeds from the sale of the house, the bank is simply out of luck---it cannot come after the family members for the shortfall.

Thus, a reverse mortgage may make sense for you if:

• you find yourself short of cash each month
• you would like to make lifetime gifts to your children or grandchildren and don't have the cash to do so
• you would like to have medical treatment not covered by Medicare or your health plan
• you'd love to go on an extended vacation
• your spouse must move into assisted living
• you like the idea of drawing down some of the equity in your house without having to repay the loan during your lifetime, so long as you are living in your house

The amount you can borrow depends on your age, the value of your house, and the current interest rate. The older you are, the more you can borrow, since your life expectancy is shorter and the bank won't have to wait as long to get repaid. Also, as interest rates rise, the amount you can borrow decreases.

However, it rarely makes sense for a single person who may soon need nursing home care to obtain a reverse mortgage, because as soon as they move out of the house, the loan will have to be repaid. That will cause the house to be sold, exposing the cash that had been protected by the home exemption. Then you have to figure out what to do with that cash so that the person qualifies for Medicaid!

If one spouse is in the nursing home and the other spouse remains at home, a reverse mortgage could indeed give additional income to the healthy spouse. In this case, the monthly payments are not actually counted as income under the Medicaid rules, which is good, since that could allow some of the nursing home spouse's income to be shifted over to the healthy spouse.

No decision about obtaining a reverse mortgage should be made without a consultation with a knowledgeable reverse mortgage specialist or financial planner. It's also a good idea to check with an elder law attorney before you sign on the dotted line, to make sure the plan still makes sense if you and/or your spouse will need nursing home care in the not too distant future.

For more information on reverse mortgages, take a look at the information provided by the Federal Trade Commission (https://www.consumer.ftc.gov/articles/0192-reverse-mortgages) or the AARP (http://www.aarp.org/money/credit-loans-debt/reverse_mortgages/). See how much you can borrow by entering your info into this useful online calculator: http://reversemortgagealert.org/reverse-mortgage-calculator

• Editor's note: To see if you qualify for a reverse mortgage, this flowchart from American Advisors Group is a good starting point.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets.

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