Reverse mortgage basics
Funding retirement and long-term care often includes a blend of savings, social security, pensions and other forms of income, but many people overlook one of their biggest assets: their home.
If you or your parent are wondering how to pay for long-term care, a reverse mortgage is one option that allows an older adult to stay in their home while tapping into its equity to pay for care. That said, it’s important to understand how this type of loan works and the pros and cons of reverse mortgages. In this article, we’ll look at when this financial tool is the right fit and explore other options you might have.
What is a reverse mortgage?
Reverse mortgage loans allow homeowners aged 62 or older to convert a portion of their home equity into cash.
Unlike a traditional home loan, borrowers receive monthly payments – rather than making them – and the loan is repaid when the borrower sells the home, moves out or passes away. At that time, the balance of the loan is deducted from the proceeds generated by selling the house, and the remainder of the value is distributed to heirs.
The Consumer Financial Protection Bureau recognizes three types of reverse mortgages. The most common is a home equity conversion mortgage (HECM) insured through the Federal Housing Administration. The other two types include non-federally insured reverse mortgages, and single-purpose reverse mortgages that can be accessed through local or state governments.
Reverse mortgages rates and terms can vary between HECM and non-HECM loans, making it crucial to compare multiple offers to ensure you get the best rates.
Reverse mortgage requirements
Before you shop around for a loan, you should familiarize yourself with reverse mortgage details so you can assess your parent’s eligibility for a loan and their ability to meet the loan obligations.
Here are the main reverse mortgage loan requirements:
- The homeowner on the loan must live in the residence the majority of the year.
- They must have a low mortgage balance or own the home outright.
- They must pay taxes and insurance, as well as maintenance and repair costs.
- The home must meet required property standards.
- The loan-holder must receive reverse mortgage counseling from a HUD-approved reverse mortgage counseling agency to verify eligibility and ensure they understand the financial implications of the loan.
Benefits of a reverse mortgage and long-term care
As noted above, the main benefit of a reverse mortgage is that it allows people to utilize the equity in their home while continuing to live there. Another benefit is that there are no monthly payments to make because the loan isn’t due until the house is sold, or the person who holds the loan moves or passes away.
Medical and personal care needs can be expensive, and reverse mortgage funds are flexible; they can be used to cover medical bills, specialized equipment and ongoing care costs. If your parent isn’t ready to downsize, a reverse mortgage is one way to fund long-term care at home. Even if they need a short-term stay at a senior living community to recover after an illness or injury, as long as they aren’t away from the home for more than 12 months at a time, they can retain eligibility for the loan.
Finally, there have been recent improvements to reverse mortgages. Historically, this type of loan has been associated with horror stories of spouses being removed from their home when a reverse mortgage comes due. However, as of 2017, the rules have changed to allow surviving spouses to remain in the home, even if they weren’t on the loan.
Drawbacks of a reverse mortgage
As AARP notes, reverse mortgages aren’t cheap.
These loans are based on age, home equity and interest rates; but because the interest is cumulative, over time it can significantly reduce the equity left in your home. If downsizing in the future or leaving an inheritance to heirs are important to your parent, it’s critical to consider how long the loan will be needed.
Also worth noting is that homeowner’s responsibilities don’t go away. Failing to pay property taxes, maintain the home and keep current insurance can result in defaulting on the loan and possible foreclosure. If you’re looking at a reverse mortgage to cover long-term care, it’s important to consider if the burden of home maintenance is feasible.
When not to use a reverse mortgage
While reverse mortgages can be a helpful financial tool for some older adults, here are a few instances when a reverse mortgage might not be the best choice:
- Short-term need. Reverse mortgages are designed for long-term use and initiating one for a short period might incur unnecessary fees and interest charges.
- Limited home equity. Since the loan amount is based on the home’s appraised value and the borrower’s age, minimal home equity may make a reverse mortgage a poor option.
- Plans to relocate. Because reverse mortgages become due when the borrower moves from or sells the home, if you’re considering downsizing in the near future, other financial options may be more practical.
- Ability to meet loan obligations. If you anticipate difficulties in maintaining the property and staying current with property taxes and home insurance payments, it’s important to carefully consider the potential consequences, such as foreclosure, before deciding on a reverse mortgage.
Long-term care options
As noted above, a reverse mortgage isn’t for everyone. If you’re concerned that the loan obligations won’t be met or that the accumulated interest on the loan won’t be worth reducing the home’s equity, it may be time to explore other financing options.
Consider these alternatives to a reverse mortgage:
- Long-term care insurance: Like most insurance, with long-term care policies you pay premiums and then make a claim when you need a service. But it’s critical to review different policies, as some may not cover the care you need and may retain the right to increase premiums after you sign up – making them far less advantageous.
- A long-term care rider on a life insurance policy: Adding a long-term care rider to a permanent life insurance policy allows the policyholder to access the death benefit early if they receive a diagnosis of a chronic illness.
- Self-insure: Though not technically insurance, investing early can provide an important buffer for long-term care expenses. It’s recommended to save enough by age 85 to pay for roughly three years of nursing care (the average age and duration it’s needed).
- Liquidating assets: If the caveats of a reverse mortgage aren’t a good fit for your family’s situation, you can still access the value of a home by selling it. Especially when care is involved, selling a home is a common way to fund long-term care in an assisted living community or nursing home.
- Medicare: While some care is covered by Medicare – such as doctor visits, hospital stays, preventative services like vaccinations and some home health care – it does not cover assisted living or long-term care. So, while Medicare may be a piece of financing care, it shouldn’t be depended upon to meet long-term needs.
One of the first steps to developing a comprehensive plan for covering long-term care costs is talking with a trusted financial advisor who specializes in long-term care planning. Seeking professional advice and conducting thorough research will empower you to make an informed decision that aligns with your financial goals and circumstances.
In addition to being a great place to live, Atria Senior Living offers abundant resources for caregivers. Contact your local Atria community for financial planners in your area and more information to help you along your caregiver journey.