What do you want to know

A reverse mortgage can be a way to pay for in-home elder care when you don’t have long-term care (LTC) insurance and need services that Medicare doesn’t cover. It can also be a burden if you have to leave your home for more than 12 consecutive months to seek care in an assisted living facility or nursing home.

The rules described in this article apply specifically to a home equity conversion mortgage (HECM). The HECM is the most common type of reverse mortgage and the only one insured by the Federal Housing Administration (FHA).

Key points to remember

  • Homeowners aged 62 and over can use a reverse mortgage to pay for elder care.
  • A reverse mortgage becomes due and payable when the owner lives elsewhere for 12 consecutive months.
  • Taking out a reverse mortgage is a major financial decision that senior homeowners should weigh carefully.

Why Use a Reverse Mortgage to Pay for Elder Care?

Many people don’t have long term care insurance. They may not know it exists, can’t afford it, or think it’s a good use of their money. They may also mistakenly believe that Medicare will cover their long-term care needs. As a result, older adults may suddenly need help with what Medicare calls “activities of daily living.” Such assistance is usually necessitated by illness or injury, and affected individuals may find themselves with no way to pay for long-term care other than to spend their assets until they qualify for Medicaid.

One way to get money for this care could be to sell the house and use the proceeds to help fund the monthly costs of living in a care facility. However, if your needs are not severe enough to require assisted living or a retirement home, you may want to stay in your own home. Not only is it likely to be more comfortable, but it can also be cheaper because you can buy treatments by the hour rather than by the month.

If your retirement savings and income are just enough to get by, you may not be able to afford home care. This is where a reverse mortgage can help. These loans allow you to tap into the equity in your home without moving, without needing good credit or a certain income to qualify, and without requiring monthly payments.

77%

The percentage of adults aged 50+ who would rather stay in their own home than move into an assisted living or nursing home

How to Use a Reverse Mortgage to Pay for Elder Care

A reverse mortgage allows homeowners aged 62 and over to access the equity in their home as a lump sum, line of credit, monthly installments, or a combination of monthly installments and line of credit . The more equity you have, the more money you can get from a reverse mortgage. If you do not have at least 50% equity, you cannot qualify.

A line of credit may be the best way to use a reverse mortgage to pay for senior care. The amount of credit you can draw on increases over time, and you don’t start earning interest on your line of credit until you start spending it.

You could potentially take out a reverse home equity line of credit at age 62 and let it grow for a decade or more before you need to use it. You can also wait until you actually need the money to get the loan. There are pros and cons to both options, but reverse mortgage experts such as Jack M. Guttentag, who has a website called “Mortgage Professor”, have demonstrated how it can benefit some people to establish a HECM line of credit from the start. possible.

What happens with my reverse mortgage if home care isn’t enough?

A key requirement for having a reverse mortgage is that you must live in the house as your primary residence. If you stop living there for 12 consecutive months due to physical or mental illness, your loan becomes due.

How will the loan officer know that you have moved?

They may not, but they do require you to sign an annual attestation stating that the house is your primary residence. You will be committing occupation fraud if you lie about it.

How will I pay off my reverse mortgage if I need to move into an assisted living facility?

Let’s say you’ve been in an assisted living facility for the past 11 months and used your reverse home equity line of credit to cover the costs. You have now reached a tipping point. If your physical condition has not improved, you will probably want to stay in assisted living. This means that you will officially have to move out of your home and pay off the reverse mortgage, as it will no longer be your primary residence.

You can do a deed in lieu of foreclosure, which transfers title to the lender in exchange for debt relief, or you can just let the lender foreclose, sell the house, pay off the loan from the proceeds, and then give you all remaining funds. However, this choice only makes sense if you owe more than the value of the house. A reverse mortgage is a non-recourse loan, so you won’t have to make up the shortfall.

If your home is worth more than you owe, you can sell your home to pay off the loan. You will repay the amount you borrowed with interest, plus the fees you paid to take out the loan and an initial premium, plus annual mortgage insurance premiums (MIPs) for the term of your loan.

Assuming your home is worth more than the sum of those bonds, you’ll walk away with the cash after paying an agent to sell your home and pay all other closing costs. The question is whether that money plus your other assets will be enough to pay for assisted living and your other expenses for the rest of your life.

What happens if my spouse wants to continue living in the house after I leave?

If your spouse is a co-borrower, they can continue to live there and you can both continue to draw funds from your loan. If not, make sure you understand the non-borrowing spouse protections for reverse mortgages.

Basically, the rules for non-borrowing spouses depend on when you took out the loan and whether you were married to your current spouse at the time. Your spouse may be able to continue living in the home and defer repayment of the loan. However, neither of you will be allowed to continue to draw on the line of credit, so you’ll need another way to pay for your care.

The essential

A reverse mortgage can be a valuable financial tool for senior homeowners with substantial net worth. This can give them options for paying for home-based elder care that they might not otherwise be able to afford. It can also become a costly obligation if you have to leave your home permanently and move into an assisted living facility or retirement home.

Every payment strategy for elderly care has its risks. It’s important to understand your options, so you can make the choice that feels most comfortable to you.

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