Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, according to the Department of Health and Human Services. However, many people do not have the savings to manage the cost of assisted living. What they do have is a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.
MSN’s recent article entitled “A reverse mortgage could be one way to pay for long-term care, but should you do it?” looks at how to evaluate whether a reverse mortgage might be a smart option.
A reverse mortgage is a loan or line of credit on the assessed value of your home. Most reverse mortgages are federally backed Home Equity Conversion Mortgages, or HECMs, which are loans up to a federal limit of $970,800. Homeowners must be 62 years old to apply.
If you have at least 50% to 55% equity in your home, you have a good chance of qualifying for a loan or line of credit for a portion of that equity. The amount depends on your age and the home’s appraised value. Note that you must keep paying taxes and insurance on the home. The loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit remains until the second borrower dies or moves out.
A reverse mortgage can provide a stream of income to pay for long-term care. However, there are some limitations. A reverse mortgage requires that you live in the home.
If you are the sole borrower of a reverse mortgage, and you move to a care facility for a year or longer, you will be in violation of the loan requirements. Therefore, you will have to repay the loan.
Because of the costs, reverse mortgages are also best suited for a circumstance where you plan to stay in your home long-term. They do not make sense if your home is not right for aging in place or if you plan to move in the next three to five years. However, for home health care or paying for a second borrower who is in a nursing home, this loan can help bridge the gap.
The income is also tax-free, and it does not affect your Social Security or Medicare benefits.
Reverse mortgages are expensive. The costs are equal to those of a traditional mortgage, 3% to 5% of the home’s appraised value. Interest accrues on any portion you have used, so eventually you will owe more than you have borrowed. Finally, you will leave less to your heirs.
Reference: MSN (June 13, 2022) “A reverse mortgage could be one way to pay for long-term care, but should you do it?”