Another concern for those entering retirement is what options they have if they find themselves needing long-term care such as in home healthcare services or if they need to move into a nursing home.
Can a homeowner still get a reverse mortgage if they need eldercare? Will they have to give up their reverse mortgage if they move into a nursing home? What if they receive in-home care?
In this article, we will explore all of these questions and more.
What is a Reverse Mortgage and How Does it Work?
Having a basic understanding of a reverse mortgage will help lay the foundation for how a reverse mortgage can and can’t be used.
The most common type of reverse mortgage loan is the home equity conversion mortgage (HECM). The other types are single-purpose reverse mortgages and jumbo reverse mortgages.
The standard reverse mortgage is backed the federal government through the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD).
A reverse mortgage works by paying off the current traditional mortgage, if there still is one. The remaining reverse mortgage proceeds can then be received in the form of one or more of the following payment options: a lump sum payment, a line of credit, and/or monthly payments.
The amount of money that homeowners are able to obtain through a reverse mortgage depends on the value of the home, the age of the youngest borrower, and the interest rates.
The FHA does put a lending limit on how much homeowners are able to borrow through a reverse mortgage. The current lending limit as of 2024 is $1,149,825.
The reverse mortgage loan becomes due when the senior homeowner decides to sell, he or she no longer lives in the home as their principal residence, or when the last remaining borrower passes away.
Reverse Mortgage Requirements
A reverse mortgage comes with the following very specific requirements that must be met in order to qualify for one:
- Age. At least one homeowner must be at least 62 years of age or older.
- Equity. You must have equity built up in your home. There is not a specific amount or percentage you must have to qualify. The amount you need will depend on the age of the borrower, the current interest rates, and the current market value of the home.
- Residency. The property must be the primary residence of the homeowner. This means that it cannot be used on a secondary home, vacation home, or an investment property. It also means that the homeowner must live in the home the majority of the year.
- Property Type. The home must be a single-family home, a two-to-four family unit in which the homeowners occupy one of the units, a townhome, an FHA approved condominium, or a HUD approved manufactured home.
- Home Condition. The property needs to be in good, maintained condition.
- Counseling. All prospective reverse mortgage borrowers must complete a counseling session with a third-party HUD approved counselor before filing the application for the reverse mortgage.
Once homeowners obtain a reverse mortgage loan, they must continue to live in the home as their primary residence, they must continue to pay the property taxes, homeowners’ insurance, and any required fees such as HOA fees, and they must continue to maintain the home.
What Can a Reverse Mortgage be used for?
There are no rules about how a reverse mortgage has to be used, which gives borrowers a lot of flexibility. Some common uses of a reverse mortgage:
- Supplementing monthly income. One of the most common uses of a reverse mortgage is to supplement monthly retirement income. This can be especially beneficial for retirees who may not have enough savings or income in retirement accounts to cover their expenses.
- Paying off credit card debt. Reverse mortgages can also be used to pay off existing debts, such as credit card debt or medical bills.
- Home renovations and repairs. Many homeowners use reverse mortgages to fund home renovations or repairs. This can include updating kitchens or bathrooms, replacing the roof, or making home modifications to make the property more accessible for those who have developed mobility challenges.
- Delaying Social Security benefits. Some individuals choose to take out a reverse mortgage to delay claiming their Social Security benefits. By doing so, they can increase their monthly benefit amount when they eventually start receiving Social Security.
- Managing unexpected expenses. A reverse mortgage can provide a safety net for homeowners facing unforeseen financial challenges. Whether it’s a major car repair or a sudden home repair, having access to additional funds can help alleviate stress.
Can a Reverse Mortgage be Used to Pay for Eldercare?
Since there are no rules about how a reverse mortgage has to be used, that means that you can use it to pay for eldercare services.
However, one thing you will want to keep in mind is the residency requirement for keeping your reverse mortgage. This requirement means that if the homeowners move out of the home for more than 12 consecutive months, the borrowers will no longer be able to keep the reverse mortgage loan, and they will have to pay it back.
These are the scenarios in which you can keep a reverse mortgage while receiving eldercare services:
- In home care. If you or your spouse are receiving care in the home, then the reverse mortgage will not be at risk.
- Temporary stay. If you or your spouse sustains an injury or another health condition that requires a temporary stay at a nursing home facility for rehab services that is fewer than 12 months, you will be able to keep your reverse mortgage.
- One borrower at home. As long as there is one borrower that remains in the home full-time while the other borrower is in a nursing home for longer than 12 months, then the reverse mortgage will not be in jeopardy.
How to Use a Reverse Mortgage to Pay for Long-Term Care?
There are multiple options for how you can receive reverse mortgage proceeds: as a lump sum, monthly payments, a line of credit, or a combination of the three. Two of these options may be especially ideal when it comes to paying for long-term care, depending on your goals.
First, if one of the primary reasons you are considering a reverse mortgage is to have funds available in the event that you need eldercare services, you may want to opt to receive your funds as a line of credit.
A reverse mortgage line of credit allows you to use the funds on an as needed basis. This is ideal for eldercare services since you don’t know when you will need it. Another advantage of a reverse mortgage line of credit is that the untouched loan actually grows over time.
Second, another way to pay for long-term care is to purchase a long-term care insurance policy. The premiums for long-term care insurance range from about $80 to $600 depending on the age and type of insurance.
If this is a cost that you are not able to cover with your current income, a reverse mortgage in the form of monthly installments could help offset those costs.
Our reverse mortgage specialists will present you with a variety of options for you to consider.
When Does it Make Sense to Use a Reverse Mortgage for Eldercare?
A reverse mortgage can help pay for eldercare services as long as the care you are receiving is in the home or in an assisted living facility for no longer than 12 consecutive months.
Can You Use a Reverse Mortgage to Pay Family Members for Their Assistance?
It’s not uncommon for seniors to rely on loved ones for assistance in retirement. If you are looking for a way to pay a family member for the help they provide, a reverse mortgage could help cover those costs as long as you remain living in the home as your primary residence.
However, if you wanted to move in with a family member, you will not be able to keep the reverse mortgage.
If you are considering a reverse mortgage and you would like to find a way to use it to fund long-term care, you do have some options as long as you don’t move out of the home for more than 12 consecutive months.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.