Reverse mortgages could present a viable option for federal retirees to fund their long-term care (LTC), but also come with some drawbacks that potential borrowers should keep in mind. This is according to Edward Zurndorfer, a certified financial planner, in a column published by My Federal Retirement.
“Many federal employees and retirees bought their current homes years ago and have accumulated equity in their homes,” Zurndorfer said in his column. “They can tap into that accumulated home equity while they continue to live in their homes to pay current and future expenses including the cost of LTC.”
While most seniors tend to use a reverse mortgage to supplement their cash flow in retirement, federal retirees may have unique interests or needs that might make a reverse mortgage an appealing option, he explained.
“[A] federal annuitant who is receiving a CSRS or FERS annuity, Thrift Saving Plan (TSP) and Social Security retirement benefits, may need to make some major improvements to their home,” he said. “They may qualify to get a lump-sum amount of money from a reverse mortgage in order to finance these improvements.”
In the realm of LTC, a person who wishes to remain in their own home or to fund the care of a spouse may also see potential in a reverse mortgage’s product features.
“Provided that the other spouse remains living in the home, a reverse mortgage could be used to pay for the annuitant’s or spouse’s stay in the assisted living or nursing home facility,” he said. “If the homeowner is an LTC insurance policyholder, then monthly payments via the reverse mortgage can be used to help pay the LTC insurance premiums.”
However, there are also potential drawbacks to consider that most reverse mortgage professionals immediately recognize as applicable to all potential borrowers.
These include “the possibility of losing the house to foreclosure if the homeowner cannot afford to pay the property taxes; the homeowner will likely leave less inheritance to his or her heirs; at least one individual has to be living in the home (such as the co-borrower or spouse) if the funds from a HECM mortgage are used to pay for the homeowner’s move to an assisted living or nursing home facility.”
Potential borrowers also need to understand that there are a lot of potential expenses the reverse mortgage customer is and could be subject to, including a loan origination fee, mortgage insurance premiums, counseling and other fees.
Zurndorfer also mentions the potential for irresponsible use that could come from an influx of money.
“A reverse mortgage allows a homeowner to borrow against the value of their home, thereby creating ‘liquid’ funds from an ‘illiquid’ asset (that is, the equity in one’s home), to be used to help pay for an important need such as LTC expenses,” he said. “But the availability of ‘liquid’ funds resulting from obtaining a reverse mortgage can create the temptation to use the liquid proceeds in an unwise manner. In that case, then the homeowner is better off avoiding a reverse mortgage.”
