Reverse Mortgages: A Good Way to Pay for Long-Term Care?

Paying for retirement and long-term care usually involves a combination of savings, Social Security benefits, pensions and other sources of income. At the same time, a home is often an older adult’s largest asset, leaving many to wonder how their home can help them pay for senior care – including using a reverse mortgage.

This article will highlight the benefits and drawbacks of using a reverse mortgage to help cover long-term care costs.

What is a reverse mortgage?

A reverse mortgage is a financial tool that older adult homeowners may leverage to help pay for care.

Reverse mortgages tend to work best for older adults who need additional funds for home-based care or living expenses. Only available for homeowners age 62 or older, reverse mortgages allow older adults to tap into a portion of their home equity while at least one homeowner remains in the home.

While it’s less common, this type of loan can also play a role in assisted living planning. For example, a reverse mortgage might be an option when one spouse moves into assisted living while the other continues living in the home and uses home equity to help cover care-related expenses. They are often less effective for older adults who expect to move into an assisted living community, memory care community or skilled nursing facility in the near future, since the loan typically becomes due when the borrower permanently leaves the home.

Reverse mortgages are complex financial products with long-term implications. Before deciding whether one is right for your situation, it’s important to understand how these loans work, their benefits and drawbacks, and when other financial options may make more sense.

How does a reverse mortgage work?

As noted above, a reverse mortgage is a type of loan that allows older homeowners to convert part of their home equity into cash.

Unlike a traditional mortgage, borrowers generally do not make the required monthly mortgage payments toward the loan balance. Instead, interest accrues over time, and the loan is typically repaid when the borrower sells the home, permanently moves out or passes away.

Reverse mortgage proceeds can be received in several ways, depending on the loan type and borrower preference:

• A lump sum
• Monthly payments
• A line of credit
• A combination of these options

When the loan becomes due, heirs may choose to sell the home, refinance the loan or repay the balance and keep the property. Most federally insured reverse mortgages are non-recourse loans, meaning borrowers or heirs generally will not owe more than the home’s value when the loan is repaid.

According to the Consumer Financial Protection Bureau, there are three primary types of reverse mortgages:

1. Home equity conversion mortgages (HECMs): The most common type, insured by the Federal Housing Administration (FHA)
2. Proprietary reverse mortgages: Private loans not backed by the federal government
3. Single-purpose reverse mortgages: Loans sometimes offered by state or local government agencies for approved uses, such as home repairs

Loan terms, fees and borrowing limits can vary significantly, so it’s important to compare multiple lenders and carefully review the costs before proceeding.

Reverse mortgage requirements

To qualify for a reverse mortgage, borrowers generally must meet several requirements:

• At least one homeowner must be age 62 or older.
• The home must be the borrower’s primary residence.
• The homeowner must either own the home outright or have a low remaining mortgage balance.
• The borrower must continue paying property taxes, homeowners’ insurance and applicable HOA fees.
• The borrower must maintain the property in good condition.
• The home must meet FHA or lender property standards.
• The borrower must complete counseling through a HUD-approved reverse mortgage counseling agency.

Lenders also conduct a financial assessment to help determine whether the borrower is likely to keep up with ongoing home-related expenses.

Benefits of a reverse mortgage for long-term care

One of the biggest advantages of a reverse mortgage is that it allows older adults to access home equity while living there. For older adults who choose to access care in their home, these funds can help cover:

• In-home caregiving
• Home health care
• Medical bills
• Accessibility modifications
• Specialized medical equipment
• Other daily living expenses

Reverse mortgages can be especially helpful for older adults who have significant home equity but limited monthly cash flow.

In some cases, reverse mortgage funds may also help cover temporary care needs after a hospitalization or illness. However, it’s important to understand that reverse mortgages are generally best suited for people who plan to remain in their homes long-term. If a borrower permanently moves into an assisted living community, memory care community or nursing home, the loan will usually become due.

Temporary absences from the home are generally allowed. For federally insured HECM loans, borrowers can typically be away from the property for up to 12 consecutive months for medical reasons before the loan may become due.

Consumer protections for spouses have also improved in recent years. Certain eligible non-borrowing spouses may be able to remain in the home after the borrowing spouse passes away, provided they meet HUD requirements and continue to meet loan obligations, such as paying taxes and insurance.

Drawbacks of a reverse mortgage

While reverse mortgages can provide financial flexibility, they also come with costs and risks. Reverse mortgages often include:

• Origination fees
• Closing costs
• Mortgage insurance premiums
• Interest charges that accumulate over time

Because interest accrues throughout the life of the loan, the amount owed can grow substantially, reducing the equity remaining in the home.

It’s also important to remember that homeowners remain responsible for:

• Property taxes
• Homeowners insurance
• HOA fees
• Home maintenance and repairs

Failing to meet these obligations can result in default and potentially lead to foreclosure.

In addition, reverse mortgages may not align well with every family’s financial goals. If preserving home equity for future housing needs or inheritance purposes is important, carefully consider how a reverse mortgage could affect those plans over time.

When a reverse mortgage may not be the best choice

A reverse mortgage may not be the right fit in every situation. Other financial strategies may make more sense if:

• The need for funds is short-term
• The homeowner plans to move in the near future
• The home has limited equity
• The borrower may struggle to maintain the property or keep up with taxes and insurance
• The older adult is likely to downsize, move in with family or transition to senior living in the near future

Because reverse mortgages are designed primarily for homeowners who intend to remain in their homes long term, they may be less practical for people already considering a move to residential senior living.

Talk with a professional before making a decision

Reverse mortgages can be helpful for older adults who need to access additional financial resources while remaining in their home, but they are not the right solution for everyone.

Before taking out a reverse mortgage, consider speaking with:

• A trusted financial advisor
• An elder law attorney
• A HUD-approved reverse mortgage counselor

Families exploring how to pay for senior care may also benefit from speaking with ElderLife Financial Services, which helps older adults and caregivers determine whether a reverse mortgage makes sense as part of a care financing plan and connects them with a lender.

Carefully reviewing all costs, loan terms and long-term care goals can help families make more informed decisions about how to pay for care.

Atria Senior Living offers resources to help older adults and caregivers navigate senior living decisions. Contact your local community to learn more about senior living options and available support resources in your area.