A person who turns 65 has almost a 7 in 10 chance of needing long-term care in the future, but does not have the savings to manage the cost of assisted living. One way to help pay is to take out a reverse mortgage and use the equity in their mortgage-free home.
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 against the assessed value of a home. Owners must be at least 62 years old to apply.
If you have at least 50% to 55% equity in your home, you have a good chance of qualifying. 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.
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 new stream of income to pay for long-term care, but there are limits.
One limitation: a reverse mortgage requires you to live in the house. If you are the sole borrower on a reverse mortgage and 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 best 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, said Marguerita Cheng, a certified financial planner from Maryland.
But for home health care or to pay a second borrower who is in a retirement home, a reverse mortgage can help fill the gap. Using home equity through the reverse mortgage is a different option than taking money out of an individual investment account, said Dennis Nolte, a certified financial planner in Florida.
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.
“Most people will find that their home is the only asset they own that appreciates this year, and that makes it a good source to use for their income needs,” said Byrke Sestok, a certified financial planner from New York.
Now may be the time to apply for a reverse mortgage, financial planners said, as 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. Another plus: All the money you take out of your reverse mortgage is tax-free and doesn’t affect your Social Security or Medicare benefits.
Reverse mortgages can solve a problem, but there are downsides to using the equity in your home.
First, you will leave less to your heirs. Instead of passing on a house that has already been paid off, you will give them a loan.
Another downside is that they are expensive. If you get a reverse mortgage, expect to pay around 3% to 5% of the home’s appraised value. You will also pay interest. Interest accrues on any part you’ve used, so you may owe more than you borrowed.
This article was provided to The Associated Press by personal finance website NerdWallet. Kate Ashford is a writer at NerdWallet.