| How Can the Equity in Your Home Help Pay for Long-Term Care? |
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Home equity is the difference between the appraised value of your home and what you owe on any mortgages. By the time you need long-term care, you may have greatly reduced or paid off your home mortgage. The value of your home may also have risen beyond its original purchase price.
Choosing to tap home equity can be a big decision. The house may be your most valuable financial asset. There are many practical and financial factors to consider:
- Should you sell your house or take out a home loan? It is important to balance health and safety issues with your desire for independence and a familiar setting.
- If it makes sense to stay at home, what are the benefits and risks associated with different types of home loans?
- How will using home equity affect your eligibility for public programs, should they be needed?
You should evaluate the use of home equity as part of your overall financial plans.
One of the most difficult decisions you may face as you age is whether it is time to leave your home and move to a more supportive setting such as an assisted living facility or nursing home. Consider several factors as you decide whether staying at own home makes sense. For many people, a house that was ideal 30 years ago may now be too difficult to handle alone. For suburban and rural elders, isolation can become a problem when driving is difficult. Deteriorating neighborhoods may also make an older person reluctant to go shopping or attend social activities. Getting good quality and reliable help, either from family caregivers or paid professionals, is another critical element.
Important Considerations:
- If you sell your home, you will not be able to pass it on to your heirs.
- The sale price may not be enough to pay for your long-term care needs.
- Market conditions will affect the selling price of your home.
- You may have to pay taxes on the capital gains from the sale of the house, depending on the sale price relative to your original purchase price and other considerations. Consult your tax advisor for details.
A Sale–Leaseback is an arrangement where you sell your home to an investor, typically at below market value, and then you remain in the home as a renter. You essentially rent your home from the investor on a long-term lease. You no longer have to worry about maintenance of the home or paying taxes. You can use the proceeds from the home sale any way you like. The investor takes over the property once you stop living there.
Important Considerations:
- Because the investor takes over ownership of the property, even though you continue to live there, your home will not stay in your family.
- You potentially face a high tax payment on the proceeds from selling your home.
- You may not qualify for public assistance as a result of the income you gain from the sale of your home.
Tapping home equity typically involves taking out a loan that uses the home as the collateral to guarantee that you will repay the loan. There are several ways you can use the equity in your home to pay for long-term care:
- Reverse mortgages
- Conventional home equity loans
- Home equity conversions
- Reverse annuity mortgages
- Lease backs
- Home modification loans
There are usually significant upfront costs associated with any type of home loan. If you have an ongoing health problem, you need to decide if it is worth taking out a loan, since you may only be able to continue to live at home for a short time.
If you expect to live in your current home for several years, consider a reverse mortgage. A reserve mortgage is a special type of home equity loan. You receive cash against the value of your home without selling it. You choose whether you want to receive a lump-sum payment, a monthly payment, or a line of credit. There are no restrictions on how you use reverse mortgage funds.
Reverse mortgages are available to homeowners age 62 and older. Unlike a traditional mortgage, with a reverse mortgage, you won't be required to provide an income or credit history to get the loan, and you do not make monthly payments. Instead, the amount you owe, based on loan payouts and interest on the loan , accumulates over time. You do not have to repay the loan as long as you continue to live in the home. The loan becomes due when you or the last borrower (such as the remaining spouse) dies, sells the home, or permanently moves out of the home.
You continue to live in the home and you retain title and ownership of it. You are also still responsible for taxes , hazard insurance, and home repairs. You do not have to repay the loan as long as you continue to live in the home. The loan is repaid when you die, sell, or permanently move out of the home. The funds from a reverse mortgage are non-taxable. They do not count toward income or affect Social Security or Medicare benefits or count as income for Medicaid benefits eligibility as long as the reverse mortgage payments you receive are spent within the month that you receive them.
- All borrowers must be 62 or older.
- There is no health requirement; your health status is not a factor.
- The home must be your primary residence.
- You won't be required to provide an income or credit history.
- Reverse mortgage funds must be used to pay off any existing mortgage or other debt against the home and to make required home repairs. You can use any remaining funds for any purpose. You must have little or no outstanding balance on your current mortgage.
- A reverse mortgage must be in first lien position, which makes it very difficult to borrow any more against your home once you have a reverse mortgage . You can refinance a reverse mortgage if the house increases significantly in value.
- All potential borrowers must first meet with a HUD-approved reverse mortgage counselor before they can start the loan process. These counselors can give you information to help decide whether a reverse mortgage is right for you.
| How Do I Use a Reverse Mortgage to Pay for Long-Term Care? |
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You can use the funds you receive from a reverse mortgage to pay for a wide array of in-home and community services and other expenses, such as home repairs and transportation, which can make it safer and more comfortable for you to live at home. However, your long-term care expenses may be greater than the amount you can get in the reverse mortgage. You can also use the funds to purchase long-term care insurance. It may be hard for a married couple to purchase long-term care insurance or pay for long-term care costs for both people with the amount available from a reverse mortgage.
Your heirs can keep your home by repaying the reverse mortgage. Your heirs can also “keep the difference” if the home's sale price is greater than the reverse mortgage loan balance when it's time to repay the loan.
| How Does a Reverse Mortgage Compare with a Conventional Mortgage? |
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Conventional Mortgage |
Reverse Mortgage |
Purpose |
Purchase a home |
Get cash from home equity |
At the time of closing: |
You owe a lot and have little equity in the home |
You owe little and have lots of equity in the home . |
During the loan: |
• You make monthly payments.
• The loan balance decreases.
• Your equity grows. |
• You receive monthly payments ( as a lump sum, monthly payment , or line of credit ).
• The loan balance rises.
• Your equity decreases. |
At the end of the loan: |
• You owe nothing.
• You have substantial equity in the home. |
• You may owe a large amount.
• You may have little or no equity in the home. |
Closing costs |
• Based on the amount of the loan .
• Can be financed as part of loan. |
• Based on appraised value of the home.
• Can be financed as part of loan. |
In short… |
• Falling debt
• Rising equity |
• Rising debt
• Falling equity |
| What Are the Different Types of Reverse Mortgages? |
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There are three types of reverse mortgages. These include:
- Home Equity Conversion Mortgage (HECM) – This program is offered by the Department of Housing and Urban Development (HUD) and is insured by the FHA. HECMs are the most popular reverse mortgages, representing about 90 percent of the market.
- Fannie Mae Home Keeper Loan – Borrowers may receive more cash from these loans than with a HECM since the loan limit for these loans is higher.
- Financial Freedom Cash Account Loans – These loans are designed for seniors who own expensive homes.
Most people get a reverse mortgage through a mortgage lender. Some credit unions and banks, along with state and local housing agencies, may also offer these loans.
Important consumer protections:
- Borrower(s) continue to own the house and can never be forced to leave as long as they maintain the home, and make property tax and hazard insurance payments.
- You must first meet with a government-approved reverse mortgage counselor before your loan application can be processed or you incur any costs.
- Borrowers (or their heirs) will never owe more than value of the home at the time they sell the home or repay the loan, even if the value of their home declines.
- For HECM loans, most upfront costs are regulated, and there are limits on the total fees and interest rates that can be charged.
Some government agencies and communities make low interest loans available for home modifications that help make your home a safer and more supportive living environment. While these loans are used specifically for home modifications and not to pay for long-term care costs, often a home modification can help someone with a physical limitation or disability to cope more effectively at home. Home modification loans may make it possible for you to stay in your own home instead of having to move to a care facility. Home modifications include things such as the installation of ramps or grab rails. The loan is repaid when you no longer live at your home.
Important Considerations :
- Home modification loans are not available to everyone. They are designed for individuals with low or moderate incomes.
- Each loan program will specify what home modifications can be made with the loan funds.
- The loan payment is due if you move out of your home.
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