Can a Reverse Mortgage Help Pay for Senior Care?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.

Reverse mortgages do make a lot of sense for someone hoping to age-in-place with the help of in-home care and potentially costly home modifications.

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.

Kristen Hicks is an Austin-based copywriter and lifelong student with an ongoing curiousity to learn and explore new things. She turns that interest to researching and exploring subjects helpful to seniors and their families for SeniorAdvisor.com.

6 Comments

  1. Nathan Peterson April 19, 2016 Reply

    Senior care is the main concern in foreign country. Because there is some issue for senior in the house so always follow reverse mortgage help pay.

  2. Tim Oddo April 19, 2016 Reply

    Thanks for your article Kristen. Reverse Mortgages are often misunderstood and have garnered a bad reputation over the years. Under the direction of HUD – many changes have been made to the HECM Reverse Mortgage program since 2013. These changes have been made to improve the program and protect the borrowers, in short to insure that if used responsibly the Reverse Mortgage can be a viable piece of your overall retirement income strategy.

    The unused portion of the Reverse Mortgage line of credit actually has a guaranteed growth rate that will continue to grow for the Senior throughout their retirement. This allows them to draw on additional funds in the future for anything from home health care, additional monthly income or just to protect savings. Recent studies have shown that a Reverse Mortgage line of credit used RESPONSIBLY can actually enhance a borrowers monthly income and/or add to their financial legacy if used in conjunction with an Investment Portfolio properly.

    Lastly, upfront costs aren’t necessarily higher than a traditional mortgage, it can vary depending on how much equity the borrower has and how much funds are needed at the time of closing. Bottom line…a Reverse Mortgage can create liquidity from an other illiquid asset and be a powerful tool when used correctly. Thanks for helping spread the word! Tim

  3. Seth Rollins May 3, 2016 Reply

    Yeah some time. A reverse mortgage is a special type of home loan for senior citizens. that requires no monthly installment payments. i think, this can help.

  4. Larry June 13, 2016 Reply

    When needing money, senior citizens who own their homes and have some equity in them can choose between getting a seniors reverse mortgage and a home equity loan. One of the potential problems with Reverse Mortgages was the practice of removing an under-62 year old Non-Borrowing spouse from the loan. This happened when a couple wanted or needed a Reverse Mortgage and one of the home owners was under 62.

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