A reverse mortgage could be one way to pay for long-term care, but should you?
This article is reproduced with permission from NerdWallet.
A person who turns 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, and many don’t have the savings to manage the cost of assisted living. But they can have a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover childcare costs.
Here’s how to assess whether a reverse mortgage might be a good option.
What is a Reverse Mortgage?
A reverse mortgage is a loan or line of credit against 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. Owners must be 62 to apply.
If you have at least 50% to 55% of the equity in your home, you have a good chance of qualifying for a loan or line of credit for some of that equity. The amount you can access depends on your age and the appraised value of the home. You must continue to pay taxes and insurance on the home, and the loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit remains until the death or departure of the second borrower.
A reverse mortgage is a non-recourse loan, which means that if the loan amount ends up being greater than the value of the home, the borrower or heir will not have to pay more than the loan amount owed or the price at which the house could be sold.
Can you use a reverse mortgage for long term care?
A reverse mortgage can provide a crucial income stream to pay for long-term care, but there are some limitations.
For example, a reverse mortgage requires you to live in the house. If you are the sole borrower on a reverse mortgage and you need to move into a care facility for a year or more, you will not meet the loan requirements and will have to repay the loan.
Due to the costs, reverse mortgages are also better suited to a situation where you plan to stay in your home for the long term. They don’t make sense if your home isn’t suitable for aging in place or if you plan to move in the next three to five years, says Marguerita Cheng, a certified financial planner in Potomac, Maryland.
But for home health care or paying for a second borrower who’s in a retirement home, home equity can help fill the gap. If you want to pay as you go and not take money out of securities in a bear market, you can take it out of the equity in your home, says Dennis Nolte, CFP in Winter Park, Fla.
Learn more: This new type of reverse mortgage would help retirees generate a lot more income
Benefits of a Reverse Mortgage
Your home is usually one of your greatest assets, and it can be a good idea to use its value to manage long-term care costs.
- You press an active “up”. “Most people will find that their home is the only asset they own that appreciates this year, making it a good source to use for their income needs,” says Byrke Sestok, CFP in Harrison, New York. .
- You can lock the value. If you think you’ll struggle to cover a future long-term care need, you can get a reverse mortgage now when home values are high. An unused line of credit grows over time, so your balance will have grown by the time you need the money.
- The income is tax exempt. All the money you take out of your reverse mortgage is tax-free and doesn’t affect your Social Security or Medicare benefits.
Read also : What are target date funds and how do they work?
Disadvantages of a reverse mortgage
Reverse mortgages can solve a problem, but there are downsides to using the equity in your home to cover the costs.
- They are expensive. Getting a reverse mortgage costs about the same as a traditional mortgage — expect to pay around 3% to 5% of the home’s appraised value. However, you may be able to build the costs into the loan.
- You have to pay interest. Interest accrues on any part you’ve used, so you may owe more than you borrowed.
- You will leave less to the heirs. The more you use your reverse mortgage, the less you will leave behind.
Read next: Don’t ignore the bad news in Social Security’s latest actuarial analysis
Whether to use the equity in your home as a source of income can be complicated and depends on your other assets and your plans for the future. A financial planner can help you work out the numbers and refer you to a licensed reverse mortgage specialist if the product is right for you.
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Kate Ashford writes for NerdWallet. Email: [email protected] Twitter: @kateashford.