Can a Reverse Mortgage Help Pay for Senior Care?
Senior care options are expensive. One of the biggest concerns many seniors have is figuring how they’re going to pay for the care they’ll increasingly need as they age. No matter how independent you are, there’s a good chance that you’ll reach a point when hiring someone to take care of you will no longer be optional.
One option many seniors consider to help fund senior care is a reverse mortgage.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan available to homeowners over 62 that allows them to turn the value of their home into cash to help cover day-to-day expenses as they age. It works exactly as it sounds – instead of paying money to the lender each month as with a traditional mortgage, the lender pays money to the homeowner.
Often they’ll pay it in a set amount monthly, but some types of reverse mortgages include options for receiving it as a lump sum or a line of credit. Unlike a traditional mortgage, the lender doesn’t claim ownership of the home. The owner remains on the title and is still responsible for taxes, HOA fees, and homeowner’s insurance. They’re simply expected to pay the loan back when they move out, die, or sell the house.
Reverse Mortgage for Senior Care
In order to qualify, the home you take out the reverse mortgage on has to be your primary residence and you must plan on continuing to live in it. For that reason, a reverse mortgage doesn’t make sense for someone looking for help with the cost of moving into assisted living or nursing home care.
They’re also a common choice for married couples in which one spouse needs assisted living or nursing home care, but the other can continue living in the home. With one spouse staying in the house, they can still qualify and use the money to help with the cost of care for the other spouse, but neither will have to worry about paying the loan back until they’ve either both moved out or died, in which case the home can be sold to cover the cost of the loan.
Types of Reverse Mortgages
There are three main types of reverse mortgages seniors can consider.
1. Single-Purpose Reverse Mortgage
Single-purpose reverse mortgages are made by state or local governments and are only available in some localities. The upside to single-purpose reverse mortgages is that they have low interest rates and they’re usually easy to qualify for; the downside is that you’re limited in what you can use them for.
The entity making the loan will specify what the funds can be spent on and you have to be careful to keep your spending of the money within their restrictions.
2. Proprietary Reverse Mortgage
Proprietary reverse mortgages are private loans that are sometimes offered by lenders on high-value homes. The main reason to go for a proprietary reverse mortgage is if you want a big advance on the loan, but many borrowers will have a hard time qualifying for these unless they live in homes worth a lot.
3. Home Equity Conversion Mortgage
Home equity conversion mortgages (HECM) are the option that most seniors will want to go for, if they choose to go the route of a reverse mortgage. They’re federally insured and can be used for any purpose you choose.
Unfortunately, they can be expensive. The upfront costs in particular are often high, so they only make sense if you expect to stay in your home for a long time and take out a considerable amount of money. If you just need a little bit to get by temporarily, then the costs to get started with an HECM aren’t likely to pay off.
Before you’re able to take out an HECM, you need to meet with a counselor so you fully understand the terms and can make an informed decision. That’s not just advice – it’s a requirement in order to qualify for the loan.
Due to the flexibility in how you can use them and the fact that many seniors can qualify, HECMs are likely to remain the most popular choice for reverse mortgages and are probably your best bet if you’re considering one.
The Pros of Reverse Mortgages
Anybody with good credit has a number of different loan options to consider, so why go with a reverse mortgage? They offer a few notable benefits that make them a smart choice for many seniors:
- They’re legally protected to ensure that the borrower will never owe more on the loan than the house itself is worth. You can count on you or your family being able to pay off the loan by selling the house.
- They’re easier to qualify for than many loans since there are no income or credit qualifications. As long as you own your home or have paid off most of your mortgage, you’re likely to qualify.
- There’s no expectation of paying the loan back until you either move or die.
If you managed to purchase property when you were young, then that decision can pay off in helping you with living expenses as you age. But only if your situation is a good fit for a reverse mortgage.
The Cons of Reverse Mortgages
Many seniors take out reverse mortgages only to realize later that it wasn’t actually the right choice for them. You have to make a careful consideration about what you really want and need and whether or not the reverse mortgage will help you achieve it in the long-term.
Some of the risks that come with a reverse mortgage can be serious:
- If you use up all the equity you have on the home early into your retirement years, you’ll be stuck with nothing left for your remaining years.
- If you were planning to leave your home to family members after your death – and if any of them is counting on it – then a reverse mortgage will put them in the position of having to cough up a lot of cash fast in order to keep the home.
- As with any loan, the amount you take out will need to be paid back with interest (although with the aforementioned assurance that you’ll never have to pay back more than the house is worth).
- If you have to move out of your home soon after taking a reverse mortgage due to needing assisted living or nursing home care, you’ll have to start paying back the loan a year after the move.
If you believe the old adage that nothing in life is free, then you shouldn’t be surprised that the same is true of a lender offering you money. If your home is special to you or your family, then the reverse mortgage may present a bigger risk than the money you get would be worth.
In certain situations, a reverse mortgage can be a lifeline to help cover necessary expenses, but don’t be deceived – it does put your home at risk. Taking out a reverse mortgage isn’t a decision anyone should take lightly. Consider carefully whether or not it’s the right choice for you and talk it over with your loved ones before doing anything rash. If you’re still not sure whether it’s a good move for you or not, talk to a financial advisor. An expert can help you see the issue with new eyes and make sure you’re making the best choice for your long-term financial security.