Reverse Mortgages and Long-Term Care: the Pros and Cons

Reverse mortgages are one possible source seniors and their families may consider to generate funds for in-home care, assisted living, or other important health needs. This increasingly popular loan option turns a borrower’s home equity into a lump sum of money or consistent monthly payments.

While proceeds from selling your home is a common way people pay for long-term care facilities, a reverse mortgage “may be helpful in circumstances where one or both parties are going to remain in the home,” says Michelle Ash, a Jacksonville, Florida-based certified financial planner and chartered adviser in senior living.

Designed to help retirees stay in their home longer, these loans are only available to people age 62 and older. “They’re a way to help seniors age in place at home or have extra funds for needed expenses,” says Ellen Skaggs, a Tustin, California-based certified reverse mortgage specialist.

Learn more about the pros and cons of reverse mortgages, as well as how to qualify, potential fees, and whether this financial tool may be a beneficial way to pay for long-term care.

What is a reverse mortgage?

A reverse mortgage is a loan that’s borrowed from your home’s equity. Home equity is the difference between the appraised value of your home and what you owe on any mortgage.

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You don’t have to pay the loan while you live in the home — it’s not due until the last borrower dies or moves from the home for one full year. Typically, the home is then sold and the proceeds go to repay the home equity amount borrowed plus interest. Any money remaining goes to the homeowner or the beneficiary.

One of the most common misconceptions about reverse mortgages is that you’re selling your house to the bank, says Skaggs. In fact, reverse mortgage borrowers maintain the title and ownership of their homes for the entirety of the loan. As long as you maintain the home and pay property taxes, you cannot be forced to move or repay the loan.

What are the types of reverse mortgages?

There are three kinds of reverse mortgages:

1. Single purpose reverse mortgages are typically offered by state and local government agencies, as well as select nonprofits. They can be the least expensive option, but the lender ultimately specifies the sole purpose of the loan. Often, it’s used for home renovations to age in place or to defer payments on some or all property taxes.
   
2. Proprietary reverse mortgages are private loans and are typically backed by companies that create them. These are usually designed to help borrowers with high-value homes, and are sometimes referred to as jumbo reverse mortgages.
   
3. Home Equity Conversion Mortgages (HECMs) account for about 95% of reverse mortgages. There is no income requirement but a financial assessment will determine whether you qualify and are approved. HECMs are insured by the Federal Housing Administration (FHA). This protects you if the lender fails. It also means that when it’s time to pay back the loan, you and your heirs don’t have to pay more than the value of the house.

What are the requirements for a Home Equity Conversion Mortgage (HECM)?

To qualify for a HECM, you must:

• Own your own home
• Be at least 62
• Have some equity in your home

Additionally, the home must be in good condition and meet U.S. Department of Housing and Urban Development (HUD) requirements. Also, you cannot have an HECM in combination with another home loan.

Eligible properties for reverse mortgages include:

• Single-family homes
• Manufactured homes built after June 1976
• Two- to four-unit properties
• Condominiums
• Townhouses

How much money can you get from a reverse mortgage?

The amount of the reverse mortgage loan depends on a few key factors:

• The age of the youngest borrower (or spouse, if the spouse is younger)
• Current interest rates
• The value of the home

Age plays a big part in determining how much money a person can receive. Older borrowers typically receive more money. (The FHA has a current lending limit of $765,600 for HECMs.)

With a reverse mortgage, interest is added to the loan balance each month, and the balance grows. Borrowers receive less than the value of the home because of the interest charges. “A reverse mortgage generally doesn’t exceed 80 to 85 percent of the value of the home, but is largely based on the borrower’s age at the time of the loan,” Ash says.

This reverse mortgage calculator provides a free estimate of the amount of money you may receive based on your age, ZIP code, and home value.

What can the funds be used for?

The funds from an HECM are first used to pay back any loans against the house. After that, the money can be used however the homeowner chooses.

For example, reverse mortgages can be used to pay for long-term care expenses such as:

• Home care services, such as help with meal prep, housekeeping, and activities of daily living
• Assisted living, memory care, or nursing home care for a spouse or parent
• Out-of-pocket medical expenses, such as hearing aids
• Home safety modifications to help with aging in place, such as a wheelchair ramp or walk-in shower
• Adult day care services or respite care

What types of payment options are available?

A reverse mortgage allows you to receive funds in three different ways, says Skaggs. You can choose to receive:

• Monthly payments
• A lump sum (all at once)
• A line of credit

You may be able to use a combination of payout options, depending on the loan. With a line of credit and monthly payments, the amount of money available to you grows over time. Unlike a lump sum or monthly payments, a line of credit doesn’t accrue interest unless you withdraw or use the money.

How do you become eligible for a reverse mortgage?

To become eligible, a person must demonstrate to the lender they’re able to pay property taxes, homeowner’s insurance, and other related costs listed in the loan agreement.

“Qualifying for a reverse mortgage is not as stringent or precise as a traditional mortgage,” says Rick Rodriguez, a certified reverse mortgage specialist in Las Vegas. “It’s not based on a minimum FICO, or credit score. It’s based on payment history, and how responsible the applicant has been in regard to making payments over the last 24 months.”

Income is taken into account. However, many seniors are eligible based on their Social Security income, Rodriguez says.

What are common fees with reverse mortgages?

HECMs are typically more expensive than other types of home loans, according to the Consumer Financial Protection Bureau (CFPB).

Upfront and ongoing costs include:

• Origination fee to begin the mortgage
• Closing costs such as appraisal, title search, surveys, inspections, recording fees, and other fees
• Counseling service costs
• Interest on the money you use from the loan
• Loan servicing fees
• FHA mortgage insurance premium

Keep in mind that costs increase with larger loan balances and the longer you keep your loan.

What are the pros of a reverse mortgage?

While the benefits of a reverse mortgage range, some pros include:

• You don’t have a mortgage payment. One of the biggest benefits is that it eliminates monthly mortgage payments, and, instead, provides additional income.
• You own your home. You’ll be able to live at home and keep full ownership if you maintain the home and pay the required insurance and taxes.
• The payments aren’t taxable. Reverse mortgage payments aren’t taxed and don’t affect Social Security or Medicare benefits.
• Your reverse mortgage may be federally insured and protected. A HECM is managed and insured by HUD. This provides peace of mind that you’ll still receive payments even if your mortgage lender defaults.
• You have financial flexibility and security. You can use payments from a reverse mortgage for anything you need now or in the future.

What are the cons of a reverse mortgage?

Reverse mortgages have some limitations and costs to note, including:

• Loan fees. Origination fees, closing fees, insurance costs, and more quickly add up, though they can typically be paid using money from the loan.
• Growing interest rates. The interest you’ll inevitably pay back will slowly accumulate each month and increase over time. The majority of reverse mortgage interest rates are tied to a financial index, which change with the market. HECMS offer fixed rate loans as well but these typically require you take the loan as a lump sum. Interest on reverse mortgages isn’t deductible on income tax returns unless the loan is paid off.
• It could disqualify you from Medicaid. The income you receive from a reverse mortgage can potentially affect your financial status and eligibility for Medicaid. This depends on your state’s rules and how much money you receive each month.
• There’s a limited amount of money that can be generated. The current loan limit on a HECM is $765,600.
• After you die, your heirs will need to repay the loan balance. Upon the death of the borrower, the heirs must the pay the loan balance or 95% of the home’s appraised value – whichever is less, according to the CFPB.
• You could run out of money. If you qualify for a loan in your early 60s, you could outlive the amount of money you receive from your reverse mortgage.

Is a reverse mortgage the best way for my family to finance long-term care?

Maybe. Reverse mortgages have become a sought-after option as the pandemic has impacted many seniors’ retirement savings, says Jennifer Fraser, director of stakeholder engagement at GreenPath Financial Wellness, a HUD-approved nonprofit financial counseling group. “Reasons for obtaining a reverse mortgage still vary. Education is key. It’s important to review all financial options to determine which is best for the borrower’s specific situation and finances. One opportunity doesn’t always fit all.”

Because deciding whether a reverse mortgage is right for you can be complex, HUD requires everyone to meet with an independent financial counselor before applying for a HECM.

“Some borrowers fail to grasp that a reverse mortgage is an option to age in place. They must maintain the home as their primary residence and maintain communication with the lender and complete all requests, so they don’t inadvertently default,” says Fraser.

A reverse mortgage maymake sense to help pay for long-term care if:

• You and/or your spouse plan to stay in your home for more than five years
• Your spouse or parent needs to move to a senior living community, and you’d like funds to help pay for it while you remain in your home
• You’re able to keep up with yard work and repairs, or you can afford to pay for help
• You can afford some living expenses, property taxes, and insurance
• Interest rates are low

“A reverse mortgage may not be for everyone,” says Skaggs. “But it is for a lot of people who are living on fixed incomes.”

A reverse mortgage maynotmake sense to help pay for long-term care if:

• You may move out in less than five years. If you have need to move due to changing health needs or other reasons, the reverse mortgage fees you paid may outweigh the benefits.
• You’re isolated at home, without friends or family nearby. Loneliness is a serious health risk for seniors, according to research.
• You cannot live safely in your home as your needs change. Stairs, uneven floors, and poor lighting can lead to accidents.
• You’re in your 60s. Borrowing too soon may leave you without funds in your later years.

Speak to a financial pro or long-term care expert

Experts recommend gaining professional advice about long-term care and payment options before deciding on a reverse mortgage or other financial solution.

• Find a qualified reverse mortgage counselor near you by visiting HUD’s counseling agency finder or calling its housing counselor referral line at 1-800-569-4287.
  
• Letsmakeaplan.org can point you to certified financial planners in your area. 
  
• The National Reverse Mortgage Lenders Association has a list of certified reverse mortgage professionals organized by state.
  
• A Place for Mom’s Senior Living Advisors have helped more than 300,000 families find home care, assisted living, and memory care for seniors. They can share information about costs and explore all of the possible ways to pay for senior care.

Sources:

Consumer Financial Protection Bureau. “Reverse mortgage loans.” 
https://www.consumerfinance.gov/consumer-tools/reverse-mortgages/

Federal Trade Commission. “Reverse mortgages.” 
https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

National Council on Aging. “Use Your Home to Stay at Home.” 
https://d2mkcg26uvg1cz.cloudfront.net/wp-content/uploads/FINAL-2018-NCOA-Reverse-Mortgage-Booklet.pdf