If you don’t have long-term care insurance (LTCI), there are other ways to pay for long-term care. Taking out a reverse mortgage is one of them.
What is a reverse mortgage?
If you’re 62 or older, you can take out a loan against your home equity to access funds through a lump sum, monthly payment or line of credit.
How do reverse mortgages work?
Home equity is wealth you don’t have access to until you sell your home or downsize or take out a reverse mortgage.
Unlike a traditional mortgage, the lender makes payments to you, not the other way around, and you decide how you receive payments. However, while you receive payments, you lose home equity and gain more debt.
Any interest you have to pay is added to the balance of your loan so that you don’t have to pay it up front. And you do not have to pay back the loan until you die or sell your home.
When you die or move, you pay off the loan — including interest and fees — by giving the lender the money you make from the sale of your home.
If you’re still alive, you get to keep any leftover proceeds tax-free, or if you’ve passed on, your estate gets the leftover proceeds tax-free.
Advantages of reverse mortgages
- They give you access to cash quickly.
- You don’t need good credit; you don’t even need to have a job.
- You don’t need to pay the loan back for as long as you live in the home full time.
- Allows you to preserve your nest egg in the face of sudden financial catastrophe.
- Won’t affect Medicare or Social Security benefits.
Disadvantages of reverse mortgages
- When you pay back the loan, much of your home equity will go to paying interest and fees.
- You risk giving your home to the lender, not your heirs.
- If someone lives with you, that person will have to move once the loan becomes payable.
- Taking out a reverse mortgage will affect Medicaid eligibility.
- You may simply outlive the funds you receive from the loan. In other words, the loan may not be enough to cover retirement, health or long-term care expenses.
When should you use a reverse mortgage?
Taking out a reverse mortgage for long-term care costs may be a good financial option if you fall into one or more of the following groups of senior homeowners:
- No LTCI coverage
- No long-term care savings or health savings accounts (HSAs)
- Not enough good credit to get a home equity line of credit
- Biggest asset is home equity
Reverse mortgages are valuable financial products to
homeowners seeking long-term care at home.
Pro tip! Homeowners who need to move into a long-term care facility or nursing home for a period of 12 months or more shouldn’t take out reverse mortgages since reverse mortgage rules would require them to sell their homes and start paying back the loan.
The bottom line
Financial advisors usually consider reverse mortgages a last option. Once you take one out, you’re stuck at home or stuck paying back the loan at a time when you have health to worry about. To find out more about other options, check out this comprehensive guide to understanding long-term care costs.
