A reverse mortgage can tap into your home equity, generating cash to pay for anything, including eldercare.
But should you use a reverse mortgage to pay for eldercare?
Let’s look at both sides of the question.
What is a reverse mortgage to pay for eldercare?
Older Americans who own their own homes often have hundreds of thousands of dollars, or more, built up in home equity.
Yet, to use this form of wealth, they’d need to sell the home, get a second mortgage, or get a new first mortgage on a free and clear property. Selling the home means finding somewhere else to live; new mortgages require monthly payments, which can strain finances.
A reverse mortgage offers a third option: a way to spend from equity without selling or taking on a new monthly payment. Homeowners who are at least 62 can usually qualify.
A reverse mortgage turns home equity into cash which can be used to pay for in-home health care and elder services that Medicare or private insurance won’t cover.See if a reverse mortgage is right for you.
Costs of using a reverse mortgage to pay for eldercare
For older adult homeowners, a reverse mortgage can seem like the perfect solution. This is especially true when homeowners face exorbitant medical costs.
But like any loan, reverse mortgages cost money. Before applying for a reverse loan, borrowers should know about these costs:
- Interest: Reverse mortgages still charge interest even though they don’t require monthly payments. Annual interest charges add to the loan’s balance.
- Fees: Loan origination fees, FHA insurance (for FHA-backed loans), and annual fees will be added to the loan balance, too.
- Loss of equity: These fees and interest charges — and the principal of the loan itself — reduce the homeowners’ share of equity and add to the lender’s share. When the homeowner moves, sells the home, or passes away, the lender’s share of equity must be paid off
It’s possible for homeowners who open a reverse mortgage to spend all their equity over time. Later, when the home sells, all the proceeds would need to pay off the reverse mortgage lender.
This may be OK, especially if the reverse mortgage funds a better quality of life by covering long-term medical costs. But a big reverse loan balance shouldn’t come as a big surprise. Knowing these costs, and how they work, can help homeowners control their costs.
Pros and cons of using a reverse mortgage to pay for eldercare
|Funds won’t be taxed as income||Interest and fees add to loan balance|
|No monthly payment required||Lender places a lien on the home|
|Homeowner keeps the home||One homeowner must live in the home|
|Funds can be received as monthly payments, a credit line, or a lump sum||Heirs may not receive any proceeds from the sale of the inherited home|
How to control costs when using reverse mortgage for eldercare
Controlling reverse mortgage costs can help older Americans stretch their equity farther and avoid an ever-growing loan balance.
Borrowers can control costs by:
Just like with a regular mortgage, a reverse mortgage loan’s rates and fees will vary by lender. Shopping around with several lenders can help borrowers find the best deals.
Borrowers can negotiate for lower rates and fees, too — especially when they have a better offer in hand from another lender.Shop around for competitive reverse mortgage rates and fees. Start here.
Considering loan types
Not all reverse mortgages work the same way. A Home Equity Conversion Mortgage (HECM), for example, features insurance from the Federal Housing Administration.
This FHA insurance prevents homeowners, or their heirs, from ever owing more than the home’s value, but this coverage also adds to the loan’s costs. A borrower who doesn’t need FHA insurance may be able to save with a proprietary reverse mortgage.
Using only what you need
Borrowing only what you need will save money. Smaller loan balances require smaller annual interest charges. Many fees will be lower, too.
And, using the reverse loan to back a credit line, instead of taking a lump sum of cash, can help control costs.
Getting a single-purpose reverse loan
Single-purpose reverse mortgages won’t pay cash directly to homeowners. Instead, they direct payments toward a specific purpose, like paying property taxes and insurance. For some homeowners, using a single-purpose loan to cover these costs can free up money for medical needs.
Single-purpose loans often have lower interest rates and lower fees, plus their balances tend to be smaller.
Making optional payments
Reverse loans require no payments, and that’s a huge selling point, but making payments anyway will help control costs.
Some borrowers pay all their interest charges and fees each year. That way those costs don’t add to the loan’s balance and erode the homeowner’s share of the equity.
Refinancing when needed
When mortgage rates drop, many reverse loan holders can refinance their debt into a new reverse mortgage with a lower rate.
Some reverse loan borrowers refinance back into a traditional mortgage or a home equity loan. This may be the case for a homeowner who needed a reverse loan temporarily.
Maxing out other sources of cash
Do you have access to private health insurance, disability insurance, Medicare or Medicaid? What about a life insurance policy with living benefits?
Using a reverse mortgage in conjunction with one of these services will stretch your home equity further.
Can I get a reverse mortgage if I need assisted living?
A main requirement of reverse mortgages is that the homeowner lives in the home at least six months per year. How could you follow this residency rule if you needed to move into an assisted living facility?
There are a couple workarounds. The Consumer Financial Protection Bureau says you can live elsewhere — including in assisted living — for up to 12 months without jeopardizing the reverse loan. So, if the need for assisted living were temporary, this could still work.
This 12-month rule applies only to FHA-backed Home Equity Conversion Mortgages, but some proprietary loans have similar rules. Check with your lender to find out for sure.
Also, having one co-borrower remain in the home is enough to meet the residency requirement. For example, if two married people co-borrowed against their equity with a reverse mortgage, and one spouse needed assisted living, the other spouse could remain in the home, keeping the reverse loan current.
Should I use a reverse mortgage for eldercare?
Ideally, you’ll never need a reverse mortgage to pay for eldercare. Other forms of wealth and insurance will cover all your living expenses and health care costs during retirement.
But if your financial life hasn’t worked out that way — and you have built equity in your home — a reverse mortgage can be a useful tool, especially when you understand and control your borrowing costs.
For most homeowners who need to pay for eldercare, the FHA’s Home Equity Conversion Mortgage, or HECM, will be the best reverse mortgage choice.
The FHA’s backing insures that heirs won’t be responsible in case the reverse mortgage balance outpaces the home’s value — also known as being “upside down.” This feature can bring peace of mind to people who worry about leaving their heirs a liability.See if you qualify for a reverse mortgage. Start here.