Reverse mortgages can be life savers for those with little savings and a low income. Eligible homeowners can remain in their homes and receive monthly checks, a lump sum of cash, or a line of credit. They can even customize a combination of payouts.
This doesn't mean that there aren't reverse mortgage disadvantages. The neediest of seniors could lose valuable government benefits if they don't structure their reverse mortgages carefully. If you or a loved one receives benefits for low-income seniors, you need to understand how a reverse mortgage can help -- and how it can hurt.
Reverse Mortgage Proceeds
Money from a reverse mortgage is not technically income. All you're really doing is taking an asset that you already own -- your home equity -- and converting it into cash. That's why the most popular reverse mortgage is called the HECM. It stands for home equity conversion mortgage, because it allows you to convert some or all of your equity into cash. That's also why you don't pay income tax on the proceeds, and why a reverse mortgage will not affect your eligibility for government benefits for people with low incomes.
Avoid Too Much Cash
The problem with reverse mortgage proceeds is that some government benefits are offered based on the amount of spending money you have. If you own a home but have little cash, your eligibility for programs like Medicaid, Supplemental Security Income (SSI) or state-based programs like COPES (Washington State's Community Options Program Entry System) is not compromised. If you were to sell your home, however, you may be kicked out of the program. You have converted your home into ready money, so the government doesn't believe you need assistance. It's the same with the HECM loan. You are giving up some or all of your home's value in exchange for cash.
Time Withdrawals Carefully
Many of these programs put a $2,000 limit on the amount of cash a participant can have before being declared ineligible. If you have $1,500 in your account and then receive a monthly check for $750 from your reverse mortgage lender, your balance increases to $2,250. If you don't get your balance down to less than $2,000 by the end of the month, you'll be over your limit and could lose your supplemental income or Medicaid benefits.
This is especially important for homeowners who choose to withdraw a lump sum instead of taking monthly disbursements. If you get $50,000 from your reverse mortgage, it had better be gone by the end of the month.
A Smarter Setup
Experts often recommend that homeowners who receive these benefits or expect to qualify for them in the future set up their reverse mortgages as lines of credit. They should then withdraw money as needed so it never parks in their bank accounts sending up red flags for government agencies.
Another advantage of setting your HECM as a line of credit is that it can grow over time, allowing you to access more home equity if you need it later.
Social Security and Medicare
Social Security Benefits and Medicare health Insurance are not tied to your income and are therefore not affected by your HECM proceeds at all. For the majority of seniors, reverse mortgage proceeds won't affect their eligibility for anything. It's potential issues like these, however, that are the reason HUD requires reverse mortgage counseling with an approved counselor before you're allowed to borrow with a HECM product. And while reverse mortgages that are not government-backed do not require counseling, it's a good idea to either make an appointment with a counselor or a trusted financial professional.