Should You Use a Reverse Mortgage to Pay for Long-Term Care?
A reverse mortgage can offer a vital source of income to cover long-term care expenses, but it comes with certain limitations and considerations. Understanding whether it’s the right choice for you involves evaluating your specific financial situation and future plans.
What is a Reverse Mortgage?
Understanding Reverse Mortgages
A reverse mortgage is a loan or line of credit based on your home's assessed value. Most reverse mortgages are federally backed Home Equity Conversion Mortgages (HECMs), with loans up to a federal limit of $970,800. Homeowners must be at least 62 years old to apply.
Qualification Criteria
If you have at least 50% to 55% equity in your home, you may qualify for a loan or credit line for a portion of that equity. The amount accessible depends on your age and your home's appraised value. You must continue to pay property taxes and insurance, and the loan is repaid when the borrower dies or moves out. If there are two borrowers, the loan remains active until the second borrower dies or moves out.
Non-Recourse Loan Benefits
A reverse mortgage is a non-recourse loan, meaning you or your heirs won’t owe more than the home's value or the loan amount, whichever is less.
Using a Reverse Mortgage for Long-Term Care
Funding Long-Term Care
A reverse mortgage can provide essential income for long-term care, but there are limitations. For instance, you must live in the home to maintain the reverse mortgage. If you’re the sole borrower and move to a care facility for more than a year, you’ll violate the loan terms and must repay the loan.
Best Use Scenarios
Due to the costs involved, reverse mortgages are best suited for those planning to stay in their homes long-term. They are not ideal if your home is unsuitable for aging in place or if you plan to move within the next few years. However, for home health care or covering costs for a second borrower in a nursing home, home equity can be a useful financial bridge. If you prefer not to sell investments in a down market, you can use your home equity instead.
Advantages of a Reverse Mortgage
Leveraging Home Value
Utilizing your home’s value to cover long-term care costs can be advantageous. Most people find their home is their only appreciating asset, making it a good source for income needs. Locking in a reverse mortgage now can be beneficial if home values are high, and an unused line of credit grows over time, increasing your available balance when needed.
Tax-Free Income
Withdrawals from a reverse mortgage are tax-free and do not affect Social Security or Medicare benefits, providing a financial buffer without additional tax burdens.
Disadvantages of a Reverse Mortgage
High Costs
Obtaining a reverse mortgage costs about as much as a traditional mortgage—around 3% to 5% of the home’s appraised value. These costs can often be rolled into the loan, but they still represent a significant expense.
Interest Accrual
Interest accrues on any borrowed amount, meaning you will eventually owe more than you initially borrowed, potentially reducing your home equity over time.
Reduced Inheritance
The more you use your reverse mortgage, the less you’ll leave to your heirs. This can significantly impact the inheritance you leave behind, a crucial consideration for many homeowners.
Conclusion
Deciding whether to use your home equity for income requires careful consideration of your other assets and future plans. A reverse mortgage can provide much-needed funds for long-term care but comes with significant costs and implications for your estate. Consulting a financial planner can help you analyze your situation and refer you to a reliable reverse mortgage specialist if it suits your needs.
