Using reverse mortgage funds to pay for long-term care

Someone who turns 65 has almost 7 out of 10 chances of needing long-term care in the future, but does not have the savings to manage the cost of assisted living. One way to help pay for it is to take out a reverse mortgage and use the capital on your home without a mortgage.

Here’s how to put one together for use with your reverse mortgage.

What is a reverse mortgage?

A reverse mortgage is a loan on the appraised value of a home. Owners must be at least 62 years old to apply.

If you have at least 50% to 55% capital in your home, you have a good chance of qualifying. The amount you can access depends on your age and the appraised value of your home. You must continue to pay taxes and home insurance, and the loan is repaid when the borrower dies or moves out.

A reverse mortgage is a loan without recourse, that is, if the amount of the loan ends up being more than the value of the home, the borrower or heir will not have to pay more than the amount of the loan due or for the house could be sold.

Can a reverse mortgage be used for long-term care?

A reverse mortgage can provide a new stream of income to pay for long-term care, but there are limitations.

One limitation: A reverse mortgage requires you to live in the house. If you are the sole borrower of a reverse mortgage and you have to move to a care center for a year or more, you are in breach of the loan requirements and you will have to repay the loan.

Because of the cost, reverse mortgages are also best suited for a situation where you plan to stay in your home for the long term. It doesn’t make sense if your home is not suitable for aging in your place or if you plan to move in the next three or five years, said Marguerita Cheng, a certified financial planner in Maryland.

But for home health care or to pay off a second borrower who is in a nursing home, a reverse mortgage can help bridge the gap. Using home equity through reverse mortgage is a different option rather than withdrawing money from an individual investment account, said Dennis Nolte, a certified financial planner in Florida.

The advantages

Your home is usually one of your most important assets, and using its value to manage your long-term care costs may make sense.

“Most people will find that their home is the only asset they own that they appreciate this year, and that makes it a good source to use it for income needs,” said Byrke Sestok, a New York Certified Financial Planner

Now may be a good time to apply for a reverse mortgage, financial planners said, because home values ​​are high. An unused line of credit grows over time, so your balance will increase when you need the money. Another benefit is that all the money you withdraw from your reverse mortgage line is tax-free and does not affect your Social Security or Medicare benefits.

The disadvantages

Reverse mortgages can solve a problem, but there are downsides to using your home’s net worth.

First, you will leave less to your heirs. Instead of relocating a prepaid home, give them a loan.

Another disadvantage is that they are expensive. If you get a reverse mortgage, expect to pay between 3% and 5% of the appraised value of the home. You will also pay interest. Interest accrues on any part you have used, so you may owe more than you borrow.

This article was provided to The Associated Press by the personal finance website NerdWallet. Kate Ashford is a writer for NerdWallet.