Dear Liz: Please write about the issues people can face when they have a reverse mortgage and need to move out to get long-term care. My mother, who is now 94 and lives on a small teacher’s pension, got a reverse mortgage in her late 60s to donate to charity because she was sure she would not live past her 80s. Now she needs long-term care and does not have the funds for it. If she moves out, she is required to sell the home. The capital gains taxes will eat up any remaining equity after that reverse loan is paid.
Answer: A reverse mortgage can be a helpful tool for people 62 or older who are house rich and cash poor. These mortgages allow people to tap some of their equity without requiring that the balances be paid back until the borrower dies, sells the home or permanently moves out.
The problem is that the debt can grow over time and leave too little equity for late-in-life expenses, such as long-term care.
Of course, many people make the mistake your mother made by underestimating their longevity risk — the chance they’ll live longer than expected and run short of money. They focus on maximizing current income by saving too little, taking out reverse mortgages too soon or applying early for Social Security without fully considering what these decisions could mean for their future selves.
Please get your mother in touch with an elder law attorney who can assess her situation and suggest alternatives. He can advise her about qualifying for Medicaid, the government health program for the poor. Medicaid will pay for long-term care expenses but rules vary by state, and a mistake could delay her eligibility.
Hi Liz, another problem with reverse mortgages is that the interest is not acquisition debt, so it is not tax deductible
True, but these days relatively few homeowners get a tax deduction for any mortgage interest, thanks to the higher standard deduction.
It sounds like a reverse mortgage that allowed her to stay in her house for 25-30 years is a pretty good deal. What you fail to mention is why she stayed in the house so long. Even if selling the house and downsizing is the most logical move, don’t underestimate the emotional bond people have with their house so if it’s an option they want to stay there. That is a huge factor with elderly people that need to tap their homes for income. They want to stay put. Also as the loan was made at least 25 years ago and home prices have inctreased every year since 2012, there’s likely considerable Home Price Appreciation unless she continually refinanced and used up all her equity. Reverse may not be a perfect solution but there is a reason they have been popular since Reagan created them.
There was certainly home price appreciation or there wouldn’t be capital gains taxes wiping out her equity. As noted in the column, there can be definite advantages to a reverse mortgage, but the growing debt can leave someone in a position late in life where they’re no longer able to access their equity when they need it.