LTC Bullet: Simple Guide to Reverse Mortgages

Wednesday, September 29, 2004


LTC Comment: With interest rates at historic lows, many seniors struggle to make ends meet. Are reverse mortgages the answer? What exactly are they? More after the ***news.***

*** TODAY'S BULLET is sponsored by Target Insurance Services and Claude Thau, who serve LTCI producers nationwide. They say "Target has unique capabilities in helping brokers find and service sponsored markets -- carve-out, association, financial institution, etc. Contact Claude Thau at or 800-999-3026, x2241 to discuss opportunities." Thanks so much, Target and Claude, for your generous support of the Center. Won't you help too? Please go to to sponsor an LTC Bullet. Find out how you can sponsor other Center activities (e.g., articles, speeches, conference "embed" reports) by contacting Amy Marohn-McDougall at 425-377-9500 or .***

*** ERRATUM. We've discovered an error on page 60 of the Center for Long-Term Care Financing's latest report: "The Realist's Guide to Medicaid and Long-Term Care." LTCi market penetration for Oregon should be 6%-9%, not 10%-14%. A corrected copy of the report is available at . The abridged version of the report, titled "The Long-Term Care Dilemma: What States Are Doing Right - and Wrong," at has also been corrected. ***

*** BOSTON ADDED. Steve Moses will present the LTC Graduate Seminar in Boston on Veteran's Day, November 11, 2004. Read on for details about the program and how to enroll.

Time is running out to sign up for the California sessions of the most advanced class on long-term care planning available anywhere. The Center's LTC Graduate Seminar is ideal for financial advisors, elder law attorneys, LTC insurance agents, long-term care providers, geriatric care managers and anyone else who advises the public about long-term care. Pre-registration is required. Call or email Amy McDougall at or 425-377-9500. For a syllabus, testimonials and more details, jump to . We offer this class only sporadically as Steve Moses' schedule permits. If you have to fly in and/or overnight in a hotel to be able to attend these California programs, present your airfare or hotel receipt when the class meets to receive a $50 refund of the $225 course fee. Grab one of these opportunities now:

Date: Friday, October 8, 2004
Time: 8 a.m. - 4:15 p.m.
Location: University of Phoenix; 2860 Gateway Oaks Drive, Room 113, Sacramento, CA 95833
Cost: $225 per person

Date: Wednesday, October 13, 2004
Time: 8 a.m. - 4:15 p.m.
Location: University of Phoenix, South Coast Learning Center, 3150 Bristol Street, Room 312 Costa Mesa, CA 92626
Cost: $225 per person
Special sponsored luncheon speaker this class only: Ralph Leisle, founder and President of LTCi Decision Systems, Inc., will address the topic "Why LTCi in High Net Households and Executive Markets?" For more information about their LTC Economic Impact Planning software, visit: ."
FLY-INS for the Costa Mesa (Los Angeles) program will find the Orange County (John Wayne) Airport most convenient.***

*** GET YOUR "CSA" AND HELP THE CENTER: The Certified Senior Advisor organization makes a contribution to the Center for Long-Term Care Financing for every new enrollee to their program who mentions the Center and cites the "source code" number 8196. Although the Center does not endorse any companies or professional designations, we've heard a lot of good things about CSA and we've met many capable professionals who have attended their training and received that designation. For information on the CSA course and certification, go to . If you enroll in the CSA program, please mention the Center for Long-Term Care Financing in your application and reference source code 8196. Drop us an email to and let us know you've enrolled. Then send us your evaluation of the program when you've completed it. CSA classes are coming up October 13-16 in Atlantic City, NJ; October 27-30 in Dallas, TX; November 10-13 in Las Vegas, NV; and December 1-4 in Orlando, FL. ***

*** LATEST DONOR-ONLY ZONE CONTENT: Here's the latest Zone content followed by instructions on how to subscribe so you can receive these critical epistles daily by email.

LTC E-Alert #4-045--Campaign Update (Bush vs. Kerry on the advisability of expanding Medicaid home and community care. Not what you'd expect.)

The LTC Data Update #4-035--AHIP Reports on LTCi Available Online (The latest data on the LTCi market plus LTCi success stories documented.)

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LTC Comment: "LTC Bullets" and our donor-only publications have occasionally recommended home equity conversion as a source of supplemental income to help seniors and their families cope with long-term care expenses. Two examples:

"LTC Bullet: Reverse Mortgages Could Fund LTC Services and LTCI Premiums," Thursday, August 8, 2002,

"The LTC Reader #3-037--Reverse Mortgages Can Supplement Seniors' Savings," Wednesday, August 13, 2003, (user name and password required)

Proceeds from a reverse mortgage can make the difference between getting help to remain at home or going to a Medicaid nursing home by default. For aging people who are still healthy enough to qualify, a reverse mortgage can make the difference between affording private long-term care insurance or "going bare."

But how do reverse mortgages work? To date we have not explored the nitty gritty details of this relatively new financial product. To learn more, we refer you to two sources. The National Reverse Mortgage Lenders Association (NRMLA) provides a wealth of information on its website at .

For a book-length (108 page) consumer guide to the subject, try T. E. Ballman's The Reverse Mortgage Handbook: A Consumer's Guide for Senior Homeowners, which is excerpted below. It's available for $12.95 from Jawbone Publishing at or for $10.36 on


Excerpted from T. E. Ballman, The Reverse Mortgage Handbook: A Consumer's Guide for Senior Homeowners, Jawbone Publishing, Kissimmee, Florida, 2004.

Heading Forward in Reverse

Most homeowners understand traditional or "forward" mortgage basics. A mortgage company loans you money to purchase your home. As you pay your monthly interest and principal payments, the equity in your home increases and your debt decreases. Simple.

Once a monthly mortgage payment is made, homeowners are offered only a few options to draw from their home's equity:

- Sell the home,

- Refinance the mortgage, or

- Apply for a home equity loan.

Selling the home may not always be the preferred option. Refinancing and home equity loans require monthly repayments plus income verification to ensure that the loan will be repaid.

For those age 62 or over, another special option is available. Homeowners remain in their homes, retain the property's title, and receive tax-free funds without making monthly repayments. This is called a reverse mortgage. It may also be considered a zero-payment home loan, since no monthly mortgage repayments are required.

With a forward mortgage, you and your home begin with a large amount of debt and very little equity. Through the years as you make monthly payments, your debt decreases as your equity (cash invested in your home) increases. As you pay your mortgage, the cash invested in your house transforms into equity.

As the name implies, a reverse mortgage is just the opposite of a forward mortgage. Homeowners convert a portion of the equity in their homes into cash. Since you retain the title to your home throughout the life of the reverse mortgage, you own your home - not the bank or mortgage lender. And, you will never owe more than the value of your home because the amount due can never exceed the home's value. No exceptions!

How homeowners spend the cash does not require any explanation. It may be used to supplement monthly income, develop a line of credit, cover medical expenses, or to simply enjoy an increased quality of life throughout the retirement years.

Reverse mortgages include numerous safety measures to protect seniors and their homes. After the final paperwork is signed at closing (and the reverse mortgage closing involves just as much paperwork as a traditional "forward" mortgage), the applicants still have three days to change their minds without legal obligation. (This is called a three-day right of rescission.)

Since many homeowners have spent a lifetime paying off a mortgage and building a place to call "home", the possibility of losing their home is a major concern. However, since you don't have to make monthly repayments on the reverse mortgage, you don't have to worry about missing a payment and losing your home. Again, you retain the title to your home. The bank or lender will not own it!

In the past, some senior citizens have been charged thousands of dollars for reverse mortgage information that is available free. Some companies call it "estate planning" fees. Beware of any company that charges a fee for simply receiving information! HUD has directed all HECM lenders to stop doing business with companies that charge such fees.

More of the federally-mandated safeguards are reviewed in detail in Chapter 7.

Tax-Free Funds

The income you receive through a reverse mortgage is not taxed; the money is already yours. These are the funds you have paid on your mortgage throughout the years. Therefore, you are not actually earning income from the reverse mortgage.

Because you are not earning income, benefits from non-need based programs such as regular Social Security and Medicare benefits should not be affected. If you receive Supplemental Social Security (SSI), Medicaid, AFDC, food stamps, or any other need-based income, reverse mortgage funds may affect your benefits (if the money is not spent in the same month it is received) . Be sure to contact a benefits specialist, your local Area Agency on Aging, or a financial counselor for confirmation of your benefits' safety.

If you are purchasing an annuity with your reverse mortgage funds, annuity advances are considered income under Supplemental Security Income (SSI) and Medicaid programs. Thus, an annuity may also affect your benefits.

Use of Reverse Mortgage Funds

You may use your reverse mortgage funds in any manner you wish. Common uses are:

- To pay rising health care costs,

- Supplement monthly retirement income,

- Purchase long term care insurance,

- Make home improvements or modifications,

- Pay off an existing mortgage or other debt,

- Purchase a new car,

- Travel,

- Gift to children or grandchildren, or

- Funding college tuition.


EXTRA: We pulled the following news about the changing demographics of reverse mortgage borrowers from the NRMLA Mid-Month Report for September 2004, published yesterday:

More Younger Seniors, Couples Using Reverse Mortgages

Addressing the National Reverse Mortgage Lenders Association's (NRMLA) 2004 Annual Meeting in Chicago last week, the government's top housing official said the average homeowner using a reverse mortgage today is somewhat younger compared to a decade ago, and more couples are taking advantage of the program, representing a dramatic shift in demographics since the program's creation in 1990.

The Honorable Dr. John C. Weicher, Deputy Assistant Secretary/Federal Housing Commissioner (FHA) at the U.S. Department of Housing and Urban Development, commented that until a few years ago, the typical reverse mortgage borrower was a 76-year-old female.

Today, the average borrower is 74 years old and females represent 48% of the market compared to 57% in 1990, according to Weicher. Couples now account for 36% of all reverse mortgage transactions, compared to 30% in 1990.

"These enlightening statistics support some of the recent trends we've been seeing, namely that a greater number of couples in their early to mid-70s are using reverse mortgages either as a lifestyle enhancement tool or to build a standby cash reserve that they can use at their discretion to pay for future expenses," said Peter Bell, President of NRMLA. "This is a different profile from the 76-year-old widow who needed a reverse mortgage to supplement her daily living expenses."

Weicher attributed the surging popularity of reverse mortgages to several factors, including effective marketing by lenders; strength of the housing market with steady increases in property values; and record low interest rates.