There’s a 70% chance
that people over 65 will need some kind of long-term care, including services
such as home care, assisted living and skilled nursing, according to government statistics.
There are lots of ways
to pay for long-term care services, including Medicare, Medicaid, traditional
health insurance, long-term care insurance, life insurance and annuities. Some people
may have access to funding via the Older Americans Act and the Department of
Veterans Affairs.
There’s an additional
option worth exploring: a reverse mortgage line of credit, in which you can
withdraw cash from the equity you have built up in your home.
Access to your home’s equity
Most reverse mortgages
involve a lump sum for an immediate need or a string of payments over
time to use a certain percentage of home equity to fund a need. Because
reverse mortgages are generally used by older people whose homes are paid off
or nearly paid off, long-term care is one natural use of the funds.
Since 1989, the
U.S. Department of Housing and Urban Development has worked with private
lenders to administer what are officially called home equity conversion mortgages,
commonly called reverse mortgages. Several modifications over the years have
added more features and programs to help homeowners 62 or older access a
portion of their home equity.
One of the options
under this program is a reverse mortgage line of credit that increases in value
each year as long as the owner doesn’t use it. Here’s an example:
Let’s say you’re 65.
You don’t need long-term care now, but you want the security of knowing it
will be there when and if you need it. You could, for example, get a $160,000
reverse mortgage line of credit that increases in value around 4% per year no
matter what the value of your $300,000 home does.
When you reach your
mid-80s and your need to pay for long-term care could be reaching a high point,
the line of credit amount would be about $350,000. As you use this
available money, you don’t have to pay a monthly bill as you would with
traditional home equity loans; the money is just subtracted from the equity in
the home. The line of credit comes due either when you move out of your home or
die, in which case your heirs or your estate could pay the loan back either
through sale of the home or other means. Depending on how much of the line of
credit has been tapped, this could result in significant debt left to heirs. If
you never used the line of credit, the equity would still be in place and would
pass to heirs along with the home.
Advantages over a HELOC
A reverse mortgage
line of credit holds some advantages over a home equity line of credit, a
similar concept in which a homeowner can borrow against the equity in the home.
With a HELOC, the borrower must begin making monthly payments immediately. With
a reverse mortgage line of credit, the borrower doesn’t have to make monthly
payments at all.
And, as indicated
above, the available funds in this type of line of credit grow over time, while
HELOCs typically provide a fixed amount that the borrower can draw against and
that the lender could freeze at any time to preclude further borrowing.
You can think of this
type of reverse mortgage as an old-age insurance vehicle. Of course, it’s not
insurance, but it’s an opportunity to have another source for funding long-term
care services if Social Security, pensions and savings can’t cover the cost of
care.
Several vendors are
offering this program for as little as $125 in total out-of-pocket cost, which
is dramatically cheaper than previous versions that included thousands of
dollars in costs and fees. That means lenders are being competitive for placing
this product, just like credit card companies offering 0% balance
transfers.
You can find lenders
in your state using the HUD website.
Having as many
resources as possible to cover long-term care needs is an important part of a
holistic financial plan. A reverse mortgage line of credit can ensure you’ll have
funds readily available at the time of need.
Visit Robin Loomis on Facebook @ http://www.facebook.com/reversemortgageaz or visit us online at our website www.NovaReverse.com
