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Retirement brings with it many financial considerations. If you are beginning to experience health concerns, long-term care may be a necessity down the road. While long-term care, whether in assisted living or a nursing home, may extend your quality of life, it doesn't come cheap. According to the American Council on Aging, the average annual cost in 2021 of a shared room in a nursing home $94,900. How can the average American pay for that?
For homeowners, a reverse mortgage may seem like a viable option. This tool, available only for homeowners 62 years of age and older, leverages the equity built up in a home. While this does give access to cash, some factors may determine whether it's the right course for you.
Key Takeaways
- Home equity conversion mortgages can be used for any purpose, including long-term care.
- Once the borrower has left the home for more than 12 consecutive months, the house will be sold to repay the mortgage and interest.
- Joint borrowers have more leeway, as the reverse mortgage doesn't have to be repaid until the last borrower leaves.
How a Reverse Mortgage Works
A reverse mortgage is a loan paid to you by a lender borrowed against the amount of equity in your home. Instead of paying the bank monthly, the lending institution loans you money based on the equity in your home. The funds can be paid out in installments or a lump sum. We'll discuss a home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
Reverse mortgages are popular because they don't typically have to be repaid until the borrower passes away, with the balance and interest paid by the home's sale. Normally, borrowers can qualify for a reverse mortgage if they have either paid off their house completely or have considerable equity in it. The amount that can be borrowed is the lesser of the home's appraised value, or the HECM FHA mortgage limit of $970,800.
Important
Remember that Medicare Part A will pay for some of your skilled nursing care if you have already had a qualifying hospital stay. For the first 20 days, you will pay no coinsurance. After that, you are responsible for a copayment of up to $194.50 per day for days 20 to 100. After that, you are entirely responsible for the cost of long-term care. If you anticipate a more extended stint, investigate long-term care insurance now.
Paying for Long-Term Care
The great advantage of a HECM is flexibility. HECMs are available in both fixed-rate versions and adjustable-rate versions. Fixed-rate reverse mortgages are typically paid in a lump sum, but adjustable-rate mortgages have several different payment options, including:
- Term: Equal monthly payments for a fixed amount of time
- Tenure: Equal monthly payments as long as the borrower is alive and residing in the home
- Line of credit: On-demand funding within a set parameter
- Modified tenure: A combination of line of credit and tenure
- Modified term: A combination of line of credit and term
No matter which funding method you choose, there are no conditions for how you use the money. Many use it for monthly expenses, home updates such as handrails and stair assists to make the house more accessible, or even in-home nursing care.
If the homeowner needs to use long-term care, funds from a reverse mortgage can be used to pay for it, but there is a caveat. One of the reverse mortgage rules stipulates that the borrower must not reside elsewhere, such as a nursing home or assisted living facility, for more than 12 consecutive months.
At the 12-month point, the reverse mortgage would have to be repaid, most likely by selling the home. If a single person lives there, that may not be an issue. If the borrower has a spouse or dependents living with them who are not on the reverse mortgage, they must vacate in order to sell the property and satisfy the loan.
Joint Borrowers Have Options
If you are part of a couple, applying for the reverse mortgage together can help prevent any issues. Tenure payments will continue, as long as one of the borrowers lives in the house as their primary residence, even if the other borrower has permanently moved to long-term care.
Can Dependents Live in My House if I Move to Long-Term Care?
Unfortunately, once the last person who took out the loan has left home for more than 12 consecutive months, the reverse mortgage will need to be repaid. Typically, this involves selling the house and repaying the loan balance using the proceeds. Any adult dependents will need to find other accommodations.
Will Medicare Pay for Long-Term Care?
If a doctor ordered your move to a skilled nursing facility after a hospital stay, Medicare Part A would pay for the first 20 days. After that, there is a copay for days 21 through 100. After 100 days, all costs are your responsibility.
Can I Use Reverse Mortgage Funds for In-Home Care?
Yes. If you only need home healthcare, you can use your reverse mortgage to pay for it. The only way to trigger a reverse mortgage payback is to leave the house for more than 12 consecutive months, fail to pay property taxes and homeowners insurance, or fail to maintain the property.
The Bottom Line
Married couples who have a joint reverse mortgage can use the monthly payments to offset the cost of long-term care. Once the last borrower on the mortgage goes to permanent long-term care, the bank will sell the home to repay the mortgage. Married couples should make sure both partners are on the reverse mortgage. Otherwise, if the mortgage holder needs permanent care outside the home, the remaining partner may have to find new living arrangements.
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Can a Reverse Mortgage Pay for Long-Term Care? - Investopedia
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