When it's time to make long-term care decisions for your senior parent or disabled loved one, you may be unsure as to whether they will be better off at home or in a...
The majority (76%) of those over 50 say they would prefer to continue living in their own home as long as they can. However, this is not always possible, and other senior living options like assisted living may need to be considered. Yet, such long-term care options can be costly. For instance, one year of assisted living can cost over $50,000 per year. If memory care or skilled nursing is required, the annual cost can be up to twice as much.
Unless one has long-term care insurance or can qualify for Medicaid, most people will need to tap all their assets, including equity in one's home, to pay for long-term care.
There are four ways to leverage home equity to finance long term care:
- Selling the residence
- Taking out a reverse mortgage
- Obtaining a home equity line of credit
- Renting the residence
Selling may not make sense if a spouse or other dependent lives in the home or the seller plans to return to the residence. Otherwise, if selling the house makes sense, there are some details to keep in mind.
- Prepare for a Long Sales Process
Even though the U.S. home sales market has been hot in recent years, homes that require a lot of updating or repairs may take some time and cost to prepare for sale.
- Selling "As-Is"
There is the option of skipping repairs and updating to selling the home "as is." This spares the homeowner from the hassle and cost of making updates and repairs. The major downside of this approach is lower profits. The homeowner needs to assess whether cost savings offset the lower asking price. It may make sense to consult a trusted realtor to conduct this analysis.
- Be Aware of the impact on Medicaid eligibility
Medicaid pays for long-term care once a person's assets have reached a low enough level. If a homeowner is living in a house, it is exempt in determining Medicaid qualification. However, as soon as it is sold, the proceeds are included in Medicaid eligibility calculations. In that case, a person who previously qualified for Medicaid would not be eligible again until those home sale dollars are spent down.
Originating in the 1960s, reverse mortgages skyrocketed in popularity as a tax-free way to pay for long-term care costs. In a regular mortgage loan, the borrower pays the lender. In a reverse mortgage, the lender pays the homeowner. This type of loan can be an excellent way to tap equity tied up in a home. However, there are essential details to keep in mind.
- The borrower must be 62 and older.
- A reverse mortgage is still a loan on which interest must be paid by the borrower to the lender.
- The borrower can continue to live in the home until death, a permanent move-out, or when the home is sold. After any of these occurrences, the loan must be repaid.
- The most popular type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the U.S. government. Non-HECM reverse mortgages are not federally insured.
- The borrower continues to pay for property taxes, homeowner's insurance, and home maintenance.
Even for a borrower who owns a home free and clear, the loan may not be for 100% of equity since the lender aims to ensure that the value of the collateral (the home) will be sufficient to repay the loan in the future. The amount of money available from a reverse mortgage depends on several factors:
- Borrower Age – the older the borrower, the more equity will be considered.
- Home Value – A higher value home will result in more cash.
- Interest Rate – The lower the rates, the more funds may be available.
- Existing Loans or Fees – The reverse mortgage proceeds first go toward paying off any outstanding mortgage balances, other loans, or fees.
- Distribution Type – The reverse mortgage dollars can be paid in several different ways. The most common are lump sum, line of credit, or monthly payments. The line of credit option often results in higher dollar amounts and lump sum the lowest.
Reverse mortgages are complex financial arrangements. Therefore, potential borrowers need to carefully compare loan options, fees, and interest rates from multiple lenders to find the best loan features and lowest interest rate.
Home Equity Line of Credit
Like a reverse mortgage, a home equity line of credit (HELOC) allows homeowners to borrow against home equity. The bank usually structures a HELOC loan for a certain amount of money over a specified period. The homeowner can borrow against this amount as needed to pay for long-term care costs. Unlike a reverse mortgage, however, monthly repayments toward the amount borrowed begin immediately. Also, missing payments may result in foreclosure. Finally, approval of a HELOC is more dependent on a borrower's credit score than for a reverse mortgage.
Despite these limitations, HELOCs have definite advantages. Fees tend to be lower in comparison to reverse mortgages. Also, there is no requirement that the borrower lives in the home. This can benefit those who need to move to a senior living setting but do not want to sell their home. Additionally, for those under 62, a HELOC has no age limitation.
Potential borrowers need to carefully assess their own situation when comparing HELOCs and reverse mortgages to determine which makes the most sense for their situation.
The monthly income from renting a home could help cover long-term care expenses. Like the other alternatives discussed above, careful analysis needs to be undertaken before becoming a landlord.
- First, if the homeowner still makes mortgage payments, the rental amount must cover these monthly payments along with property taxes, homeowner's insurance, and home maintenance. In most cases, a home owned free and clear would be the best candidate for a rental.
- Second, the homeowner may or may not choose to live in the home while renting. This depends on the configuration of the rental space. One possible scenario would be a couple with one partner living in a senior living setting and the other still at home. Renting part of the house could generate needed income for long-term care costs.
- Third, serving the role of landlord takes significant effort. In some situations, others may need to perform this role (e.g., family members.) Homeowners need to make sure whoever takes on this task understands and commits to doing the work involved.
- Fourth, 100% tenant occupancy is not guaranteed. As a result, there may be months with no rental income.
- Fifth, if a long-term financing plan includes a Medicaid component, the impact of rental income on Medicaid eligibility needs to be assessed. Each state has its own rules in these situations. It makes sense to discuss this option with a financial planner versed in Medicaid rules.
Leveraging the equity in a home can be a smart way to help finance long-term healthcare costs. However, the method for doing this requires thoughtful assessment to ensure it meets the homeowner's specific needs.
This is the third part of our blog series about options for paying for long-term care. To be notified of upcoming posts, subscribe to our blog!