Should a Reverse Mortgage Be Used for Long-Term Care?
Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, according to the Department of Health and Human Services. However, many people don’t have the savings to manage the cost of assisted living. What they do have is a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.
MSN’s recent article entitled “A reverse mortgage could be one way to pay for long-term care, but should you do it?” looks at how to evaluate whether a reverse mortgage might be a smart option.
A reverse mortgage is a loan or line of credit on the assessed value of your home. Most reverse mortgages are federally backed Home Equity Conversion Mortgages, or HECMs, which are loans up to a federal limit of $970,800. Homeowners must be 62 years old to apply.
I find that when it comes to long-term care, reverse mortgages are generally NOT a good idea, especially if your goals are to finance long-term care. If you obtain a reverse mortgage in exchange for cash (the equity in your home), the resulting cash is a “non-exempt asset” that must be used for your care, whereas the home itself is generally an exempt asset (at least on the “front end” when attemting to qualify for Medicaid long-term care). However, even if the home is exempt on the “front end” it may not be exempt on the “back end” when you pass away due to Medicaid Estate Recovery. This allows Medicaid to recover what they paid on your behalf for your long-term care up to the value of your home. Of course, the best option is to protect the home entirely and qualify for Medicaid long-term care, which can be done through advanced planning with an irrevocable trust.
With that said, if financing long-term care is not your goal, a reverse mortage can be a viable option for achieving other goals (although I discourage my clients from them). If you have at least 50% to 55% equity in your home, you have a good chance of qualifying for a loan or line of credit for a portion of that equity. The amount depends on your age and the home’s appraised value. Note that you must keep paying taxes and insurance on the home. The loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit remains until the second borrower dies or moves out.
If you’re the sole borrower of a reverse mortgage, and you move to a care facility for a year or longer, you’ll be in violation of the loan requirements. Therefore, you’ll have to repay the loan.
Because of the costs, reverse mortgages are also best suited for a circumstance where you plan to stay in your home long-term. They don’t make sense if your home isn’t right for aging in place or if you plan to move in the next three to five years. However, for home health care or paying for a second borrower who’s in a nursing home, this loan can help bridge the gap.
The income is also tax-free, and it doesn’t affect your Social Security or Medicare benefits.
Reverse mortgages are expensive. The costs are equal to those of a traditional mortgage, 3% to 5% of the home’s appraised value. Interest accrues on any portion you’ve used, so eventually you will owe more than you’ve borrowed. Finally, you’ll leave less to your heirs.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
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Reference: MSN (June 13, 2022) “A reverse mortgage could be one way to pay for long-term care, but should you do it?”