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Someone who turns 65 has nearly 7 out of 10 chances of needing long-term care in the future, according to the Department of Health and Human Services, and many do not have the savings to manage the cost of assisted living. But they may have a mortgage-free home, and their assets, giving them the potential option of a reverse mortgage to help cover the cost of care.
Here’s how to put one together for use with your reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is a loan or line of credit on the 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 years old to apply.
If you have at least 50% to 55% capital in your home, you have a good chance of qualifying for a loan or line of credit for a portion of that capital. The amount you can access depends on your age and the appraised value of your home. You must continue to pay taxes and home insurance, and the loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit is maintained until the second borrower dies or moves away.
A reverse mortgage is a loan without recourse, that is, if the amount of the loan ends up being more than the value of the home, the borrower or heir will not have to pay more than the amount of the loan due or for the house could be sold.
Can a reverse mortgage be used for long-term care?
A reverse mortgage can provide a crucial source of income to pay for long-term care, but there are some limitations.
For example, a reverse mortgage requires you to live at home. If you are the only reverse mortgage borrower and have to move to a care center for a year or more, you are in breach of the loan requirements and will have to repay the loan.
Because of the cost, reverse mortgages are also best suited for a situation where you plan to stay in your home for the long term. It doesn’t make sense if your home isn’t suitable for aging 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 to pay for a second borrower who is in a nursing home, home equity can help bridge the gap. If you want to pay as you go and not take money out of stocks in a bear market, you can take it out of your home equity, says Dennis Nolte, CFP in Winter Park, Florida.
Learn more: This new type of reverse mortgage would help retirees generate much more income
Advantages of a Reverse Mortgage
Your home is usually one of your most important assets and it may make sense to use its value to manage your long-term care costs.
- You are playing an “up” resource. “Most people will find that their home is the only asset they own that they appreciate this year, and that makes it a good source to use it for income needs,” says Byrke Sestok, CFP at Harrison, New York.
- You can lock the value. If you think you may have trouble covering a future need for long-term care, you can get a reverse mortgage now, when the value of your home is high. An unused line of credit grows over time, so your balance will increase when you need the money.
- Income is tax-free. All money you withdraw from your reverse mortgage line is tax-free and does not affect your Social Security or Medicare benefits.
Also read: What are target funds and how do they work?
Disadvantages of a Reverse Mortgage
Reverse mortgages can solve a problem, but there are downsides to using your home equity to cover costs.
- They are expensive. Getting a reverse mortgage costs about as much as getting a traditional mortgage – expect to pay between 3% and 5% of the appraised value of the home. However, you may be able to incorporate the costs into the loan.
- You have to pay interest. Interest accrues on any part you have used, so you may owe more than you have borrowed.
- You will leave less to the heirs. The more you use your reverse mortgage, the less you will be left behind.
Read below: Don’t ignore the bad news from the latest Social Security actuarial analysis
The question of whether to use your household assets as a source of income can be a daunting task and depends on your other assets and plans for the future. A financial planner can help you run the numbers and refer you to a verified reverse mortgage specialist if the product makes sense to you.
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Kate Ashford writes for NerdWallet. Email: kashford@nerdwallet.com. Twitter: @kateashford.