Reverse Mortgages and Eldercare: What You Need to Know

Reverse mortgages can help pay for eldercare, but there are pitfalls

A reverse mortgage can be a way to pay for in-home eldercare when you don’t have long-term care insurance and need services that Medicare doesn’t cover. It also can be a burden if you have to move out of your home for more than 12 consecutive months to get care in an assisted-living facility or a 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 Takeaways

  • Homeowners age 62 or older may be able to use a reverse mortgage to pay for eldercare.
  • A reverse mortgage becomes due and payable when the homeowner lives somewhere else for 12 consecutive months.
  • Taking out a reverse mortgage is a major financial decision that older homeowners should weigh carefully.

Why Use a Reverse Mortgage to Pay for Eldercare?

Many people do not have long-term care insurance. They may not know it exists, be able to afford it, or think it’s a good use of their money. They may also mistakenly think that Medicare will cover their long-term care needs. As a result, older people can suddenly find themselves needing assistance with what Medicare terms “activities of daily living.” Such assistance is generally necessitated by an illness or injury, and those affected can end up without having a way of paying for long-term care other than spending down their assets until they qualify for Medicaid.

One way to get the money for such care could be to sell the home and use the proceeds to help finance the monthly costs of living in a care facility. However, if your needs are not severe enough to require assisted living or a nursing home, you might want to stay in your own home. It is not only likely to be more comfortable but also may be less expensive because you can purchase care by the hour instead of by the month.

If your retirement savings and income are just enough to allow you to get by, you may not have a way to afford in-home care. That’s where a reverse mortgage can help. These loans let you tap into your home equity without moving out, needing good credit or a certain income to qualify, or requiring any monthly payments.

77

The percentage of adults ages 50 and older who would prefer to stay in their own home rather than move into an assisted-living facility or a nursing home

How to Use a Reverse Mortgage to Pay for Eldercare

A reverse mortgage allows homeowners ages 62 and older to access their home equity as a lump sum, a line of credit, a stream of monthly payments, or a combination of monthly payments and a line of credit. The more equity you have, the more money you can get from a reverse mortgage. If you don’t have at least 50% equity, then you may not qualify.

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

You could potentially take out a reverse mortgage line of credit at age 62 and let it grow for a decade or longer before you need to use it. You could 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 be advantageous for some people to establish an HECM line of credit as early as possible.

What happens with my reverse mortgage if home care is no longer enough?

A key condition of carrying a reverse mortgage is that you must live in the home as your principal residence. If you stop living there for 12 consecutive months as a result of physical or mental illness, your loan becomes due and payable.

How will the loan servicer know that you’ve moved out?

Maybe they won’t, but they do require you to sign an annual certification stating that the home is your principal residence. You’ll be committing occupancy fraud if you lie about it.

How will I repay my reverse mortgage if I have to move into assisted living?

Let’s say that you’ve been in an assisted-living facility for the past 11 months and using your reverse mortgage line of credit to cover the costs. You’ve now reached a tipping point. If your physical condition hasn’t improved, you’ll probably want to stay in assisted living. This means that you’ll have to officially move out of your home and repay the reverse mortgage, because it will no longer be your principal residence.

You could do a deed in lieu of foreclosure, which transfers the home title to the lender in exchange for being relieved of the debt, or you could simply let the lender foreclose, sell the home, repay the loan from the proceeds, and then give you any remaining funds. However, this choice only makes sense if you owe more than the home is worth. 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 repay the loan. You’ll be repaying the amount that you borrowed with interest, plus the fees you paid to take out the loan, and up-front and annual mortgage insurance premiums (MIPs) for the life of your loan.

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

What if my spouse wants to keep living in the home after I move out?

If your spouse is a co-borrower, they can keep living there, and you both can keep drawing funds from your loan. Otherwise, you’ll want to make sure that you understand 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 that time. Your spouse may be able to keep living in the home and defer loan repayment. However, neither of you will be allowed to keep drawing on the line of credit, so you’ll need another way to pay for your care.

The Bottom Line

A reverse mortgage can be a valuable financial tool for older homeowners with substantial equity. It can give them options to pay for eldercare at home that they otherwise might not be able to afford. It also can become an expensive obligation if you have to permanently move out of your home and into an assisted-living facility or a nursing home. 

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

Article Sources
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  2. Medicare.gov. “Long-Term Care.”

  3. American Council on Aging. “Spending Down Assets to Become Medicaid Eligible for Nursing Home / Long Term Care.”

  4. Medicaid.gov. “Long Term Services & Supports.”

  5. Genworth. “Cost of Care Trends & Insights.”

  6. AARP. “Despite Pandemic, Percentage of Older Adults Who Want to Age in Place Stays Steady.”

  7. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”

  8. Federal Trade Commission, Consumer Advice. “Reverse Mortgages.”

  9. American Advisors Group. “Key Factors That Determine Your Reverse Mortgage Loan Payout.”

  10. Code of Federal Regulations. “Title 24 § CFR 206.25(g).”

  11. Mortgage Professor. “Should You Take a Reverse Mortgage Now, or Would It Be Better to Wait? (When Does ‘Watchful Waiting’ Become Procrastination?)

  12. Code of Federal Regulations. “Title 24 CFR § 206.27(c)(2)(ii).”

  13. Code of Federal Regulations. “Title 24 CFR § 206.211.”

  14. Code of Federal Regulations. “Title 24 CFR § 206.125.”

  15. Code of Federal Regulations. “Title 24 CFR § 206.27(b)(8).”

  16. Code of Federal Regulations. “Title 24 CFR § 206.125(c).”

  17. Consumer Financial Protection Bureau. “How Much Will a Reverse Mortgage Loan Cost?

  18. U.S. Department of Housing and Urban Development. “Mortgagee Letter 2021-11: Amendments to HUD’s Non-Borrowing Spouse Policy for All Home Equity Conversion Mortgage (HECM) Loans,” Pages 3–4.

  19. Consumer Financial Protection Bureau. “What Happens If I Have a Reverse Mortgage and I Have to Move Out of My Home, Such as Moving Into a Nursing Home or to Live with Family?