If you or a spouse need home care, funding that care can be a challenge. However, if you own a home, then taking out a reverse mortgage may give you the cash that you need for home modifications, home care services, and other modifications that will help you to safely age in place.
Choosing to Use a Reverse Mortgage to Pay for Home Care
Reverse mortgages can be beneficial in a number of situations, and they can help you to afford the home care you or a loved one need. But they’re not right for everyone. Here’s what you should know about reverse mortgages and weighing their pros and cons for your situation.
Understanding a Reverse Mortgage
A reverse mortgage is a cash loan that you can take out against the equity you have in your home. You can request a single lump sum, monthly installments, or a line of credit. While there are a number of different types of reverse mortgages, the Home Equity Conversion Mortgage is the type that you will need if you’re looking to use the funds for home care.
How Much You Can Get in Your Reverse Mortgage
The amount that you’ll be eligible to receive for your reverse mortgage will depend on your age and the value of your home. Many factors contribute to the value, including the area that you live in and the condition of your home. You can typically borrow between 20% and 70% of your home’s value, but be sure to consider that closing costs range from between 2% to 8% of the total amount of your loan.
In order to take out a reverse mortgage, you will need to be at least 62 years old.
Taking Out a Line of Credit
You can also take out your reverse mortgage as a line of credit. The advantage of this method is that the line of credit has a built-in growth factor which allows the unused portion to grow at interest on the loan, plus 0.5%. If you take out a line of credit early on, the growth on the unused portion of your loan will compound through the years. In retirement, you can access that money, tax-free.
Let’s say a 65-year-old couple owned a $450,000 house outright with no mortgage. Their initial line of credit would be $171,000. If the couple didn’t use the line of credit right away, then by the time they were 75 the line of credit would be $299,000 because of the compounded interest. Once the couple was 85, the line of credit would be $524,000. Let’s say that when they were 85, the couple needed home care. At that point, they could turn the line of credit into a $10,000 monthly check for five years. By taking out the line of credit early and not using it for as long as possible, the couple more than doubled the amount of money available to them because of the interest that it received.
Repaying Your Reverse Mortgage
It’s important that you understand when your reverse mortgage needs to be repaid, since this factor will largely determine whether taking out a reverse mortgage is right for you.
You must repay your loan when the last borrower either sells the house, moves out of the house for a period of 1 year, or passes away. Both you and your spouse can take out a reverse mortgage together, so if one of the borrowers passes away, their spouse won’t be responsible for repaying the loan until one of those conditions applies.
Generally, reverse mortgages are repaid when the house is sold. You will never owe more on a reverse mortgage than the value of your home, so this provides a practical way to ensure you or your family are able to repay the loan.
Different Ways to Use Your Reverse Mortgage
One of the major benefits of a reverse mortgage is that you can use the money in any way you need; there are no restrictions. Many seniors use reverse mortgages to fund modifications to their homes that will allow them to safely age at home. You can also use a reverse mortgage loan to fund home care services for yourself or for a loved one.
Because a reverse mortgage must be repaid if the last borrower moves out of the home for at least a year, it isn’t an ideal method for funding nursing home care or assisted living, since you will be required to repay the loan after a year of moving out of the house. In this situation, it would be simpler and probably financially beneficial to just sell your house.
However, if you’re planning on aging in place, or you or a spouse plan to remain at home, then a reverse mortgage may make sense. You can use the funds to pay for home care services to help you safely stay in your house. Some people use the money for home repairs, renovations, and modifications, like building ramps, to make their house more accessible and safer as they age.
Your Next Steps
If you would like to explore a reverse mortgage, then it’s best to talk with your financial advisor. They can help you to examine the pros and cons for your specific situation, and can connect you to a reputable lender, such as Bob Tranchell, HECM Senior Vice President of The Federal Savings Bank in Hyannis, MA.
Wondering how home care can help, or what services might cost? Please contact us today. We would love to discuss how we can help.