Should you use a reverse mortgage to pay for long-term care?

Jun 1, 2022, 4:00 AM | Updated: 4:03 am

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, and many don’t have the savings to manage the cost of assisted living. But they may have a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.

Here’s how to evaluate whether a reverse mortgage might be a good option.

WHAT IS A REVERSE MORTGAGE?

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. How much you can access depends on your age and the home’s appraised value. You must keep paying 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 second borrower dies or moves out.

A reverse mortgage is a non-recourse loan, meaning if the loan amount ends up being more than the home’s value, the borrower or inheritor won’t have to pay more than the loan amount owed or what the home could be sold for.

CAN YOU USE A REVERSE MORTGAGE FOR LONG-TERM CARE?

A reverse mortgage can provide a crucial stream of income to pay for long-term care, but there are some limitations.

For instance, a reverse mortgage requires that you live in the home. If you’re the sole borrower of a reverse mortgage and you have to move to a care facility for a year or longer, you’ll be in violation of the loan requirements and must repay the loan.

Because of the costs, reverse mortgages are also best suited for a situation where you plan to stay in your home long-term. They don’t make sense if your home isn’t right 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 nursing home, home equity can help bridge the gap. If you want to pay as you go and not pull money out of securities in a down market, you can pull it out of your home equity, says Dennis Nolte, a CFP in Winter Park, Florida.

ADVANTAGES OF A REVERSE MORTGAGE

Your home is generally one of your biggest assets, and using its value to handle long-term care costs can make sense.

— YOU’RE TAPPING AN “UP” ASSET. “Most people will find that their home is the only asset they own appreciating this year, and that makes it a good source to utilize for income needs,” says Byrke Sestok, a CFP in Harrison, New York.

— YOU CAN LOCK IN VALUE. If you think you’ll have trouble covering 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 increased by the time you need the money.

— THE INCOME IS TAX-FREE. All money you withdraw from your reverse mortgage line is tax-free, and it doesn’t affect your Social Security or Medicare benefits.

DISADVANTAGES OF A REVERSE MORTGAGE

Reverse mortgages can solve a problem, but there are downsides to using the equity in your home to cover costs.

— THEY’RE EXPENSIVE. Getting a reverse mortgage costs about as much as getting a traditional mortgage — expect to pay about 3% to 5% of the home’s appraised value. However, you may be able to roll the costs into the loan.

— YOU MUST PAY INTEREST. Interest accrues on any portion you’ve used, so eventually you will owe more than you’ve borrowed.

— YOU’LL LEAVE LESS TO HEIRS. The more of your reverse mortgage you use, the less you’ll be leaving behind.

The question of whether to use your home equity as a stream of income can be complicated and depends on your other assets and plans for the future. A financial planner can help you run the numbers and point you toward a vetted reverse mortgage specialist if the product makes sense for you.

_____________________________________

This article was provided to The Associated Press by the personal finance website NerdWallet. Kate Ashford is a writer at NerdWallet. Email: kashford@nerdwallet.com.

RELATED LINK:

NerdWallet: Reverse mortgages: Pros and cons https://bit.ly/nerdwallet-reverse-mortgages-pros-and-cons

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

This photo provided by UMBC, University of Maryland, Baltimore County (UMBC) Professor Weihong Lin,...
Associated Press

Biomedical grantmakers’ diversity push gains new momentum

One and a half billion dollars is a big mea culpa, but that is what one philanthropy is throwing on the table to address what it admits is a longstanding problem: the failure to advance diversity, equity, and inclusion (DEI) in health research. The Howard Hughes Medical Institute, one of the nation’s wealthiest philanthropies, in […]
7 hours ago
FILE - Elvira, a bracco Italiano, competes in the 24 inch class at the Masters Agility Competition ...
Associated Press

Ciao! American Kennel Club adds a breed, the bracco Italiano

NEW YORK (AP) — U.S. dog lovers, say “benvenuto” to the bracco Italiano. The ancient Italian bird-hunting dog is the 200th member of the American Kennel Club’s roster of recognized breeds, the organization announced Wednesday. That means the handsome, powerful but amiable pointers can now go for best in show at many U.S. dog shows, […]
7 hours ago
German Interior Minister Nancy Faeser addresses the media during a press conference in Berlin, Germ...
Associated Press

Germany eases path to permanent residency for migrants

BERLIN (AP) — Tens of thousands of migrants, who have been living in Germany for years without long-lasting permission to remain in the country, will be eligible for permanent residency after the government approved a new migration bill Wednesday. The new regulation, endorsed by the Cabinet, applies to about 136,000 people who have lived in […]
7 hours ago
FILE - The Activision Blizzard Booth is shown on June 13, 2013, during the Electronic Entertainment...
Associated Press

Microsoft’s Activision Blizzard bid faces UK antitrust probe

LONDON (AP) — Microsoft’s acquisition of game publisher Activision Blizzard faces antitrust scrutiny in the U.K., where competition regulators said Wednesday they’ve opened an initial inquiry into the $69 billion deal. The Competition and Markets Authority said it has started looking into whether the tie-up would result “in a substantial lessening of competition” in the […]
7 hours ago
FILE - Carlos Santana performs at the BottleRock Napa Valley Music Festival in Napa, Calif., on May...
Associated Press

Rocker Carlos Santana ‘doing well’ after collapsing onstage

DETROIT (AP) — Guitar icon Carlos Santana collapsed on stage during a show in Michigan and was rushed to a hospital, later blaming the episode on forgetting to eat or drink water. Santana, 74, was “doing well” Wednesday after being taken from his show at Pine Knob Music Theatre in Clarkston, some 40 miles northwest […]
7 hours ago
FILE - People thought to be migrants who undertook the crossing from France in small boats and were...
Associated Press

39 suspects arrested over migrant smuggling on boats to UK

PARIS (AP) — The suspected ringleader of a network that smuggled as many as 10,000 people on small boats across the English Channel to Britain has been arrested along with 38 others in a vast police operation across Europe. In addition to the arrests, authorities said Wednesday that police found 135 boats in places including […]
7 hours ago

Sponsored Articles

...
Day & Night Air Conditioning, Heating and Plumbing

Most plumbing problems can be fixed with regular maintenance

Instead of waiting for a problem to happen, experts suggest getting a head start on your plumbing maintenance.
...
Carla Berg, MHS, Deputy Director, Public Health Services, Arizona Department of Health Services

Update your child’s vaccines before kindergarten

So, your little one starts kindergarten soon. How exciting! You still have a few months before the school year starts, so now’s the time to make sure students-to-be have the vaccines needed to stay safe as they head into a new chapter of life.
...
Arizona Division of Problem Gambling

Arizona Division of Problem Gambling provides exclusion solution for young sports bettors

Sports betting in Arizona opened a new world to young adults, one where putting down money on games was as easy as sending a text message.
Should you use a reverse mortgage to pay for long-term care?