Every year, thousands of families are faced with the prospect of taking care of an older loved one. When it comes to the question of long-term care, families have several options at their disposal to make the golden years of their beloved family members more comfortable as the years go on. However, the question of how to pay for long-term care is one that many families and even older adults themselves often struggle with.
Reasons for Long Term Care
Aging is an inevitable part of life. As loved ones age, their care needs can change drastically. The level of long-term care needed varies from person to person - some older adults choose to embrace an active lifestyle for as long as possible, while others require more intensive levels of care. Nevertheless, long-term care is an eventual requirement for most people.
As many older adults own their own homes, there's also a desire to remain in familiar and comfortable surroundings for as long as possible. In-home care is a popular option for those in need of long-term care. However, such home care can be prohibitively expensive for those without the adequate insurance coverage or other means of reliably covering those costs.
How Home Equity Can Help Fund Long Term Care
What many people don't know about home ownership is that it also offers an excellent asset that they can borrow against when it comes to long-term care. Older adults can use the equity in their own homes to help fund their own long term care. Doing so can relieve considerable pressure on other family members and help older adults secure comfortable care as they age.
Home equity loans are the traditional way of unlocking the equity in a home. Most seniors use conventional home equity loans to pay off debts, existing mortgages and make home repairs. However, since a conventional home equity loan has to be paid back with interest, it doesn't completely free up home equity. Reverse mortgages offer a better way of unlocking equity without the downside of a conventional home equity loan.
Using Reverse Mortgages for Long Term Care Funding
With a reverse mortgage, older adults can tap into the equity of their homes to pay for in-home personal and medical care. A reverse mortgage works differently than most other conventional home equity loans. Instead of borrowing the money in a lump-sum and making monthly payments, borrowers instead receive payments from the lending institution. As borrowers become older and their home equity grows, they usually see larger benefits from their reverse mortgage.
Unlike a conventional home equity loan, the proceeds from a reverse mortgage are tax-free and can be used as the borrower pleases. Another benefit of having a reverse mortgage is that it is not due and payable until the borrower passes away, sells the home or otherwise ceases occupying the home as a principal residence. While the balance of the borrowed funds comes due at that time, any additional equity in the home remains with the owners or their beneficiaries.
- Homeowners retain full ownership of their home, the lending institution simply owns a lien on the property.
- In the event that there isn't enough equity to cover repayment, the lending institution cannot demand payment from family members.
- When the loan comes due, homeowners will not owe more than the value of their home.
Reverse Mortgage Requirements and Caveats
In order to qualify for a reverse mortgage, applicants must first meet the following eligibility requirements. Applicants:
- Must be at least 62 years of age or older.
- Must own and live in their home as a primary residence. Primary residences must be a home, condominium, permanent mobile home, manufactured home or co-op.
In most cases, applicants are not subject to income, credit or asset requirements, which makes reverse mortgages one of the easiest loans for older adults to qualify for. However, the amount of benefits homeowners may receive in a reverse mortgage not only depends on the amount of equity in their home, but also depends on a variety of other factors:
- Their age at the time of application.
- The type of mortgage program selected.
- Current interest rates.
In some cases, the location of the home itself may also be a definite factor when it comes to a reverse mortgage. Also, there may be limits on the equity that can be withdrawn from the borrower's property. Any outstanding liens placed against the borrower's property must also be paid off by the reverse mortgage before additional funds can be withdrawn.
Home Equity Conversion Mortgage (HECM) Loans
The Federal Housing Administration's HECM reverse mortgage program is a government-sponsored effort to help older homeowners unlock the equity in their homes. While the HECM program operates in the same manner as a conventional home equity loan, it also features five flexible payment options, each one tailored to suit a specific need:
- Tenure - Offers equal monthly payments for as long as the borrower remains alive and maintains the property as a principal residence.
- Term - Similar to a tenure plan, it offers equal monthly payments. However, those payments are made for a fixed period of months selected by the borrower.
- Line of Credit - Unlike tenure and term plans, line of credit plans offer unscheduled payments at a time of the borrower's choosing and in the amounts the borrower requests until the line of credit is completely exhausted.
- Modified Tenure - Combines both scheduled monthly payments with unscheduled payments on demand for as long as the borrower maintains the home as a primary residence.
- Modified Term - Combines both scheduled monthly payments with unscheduled payments on demand for a fixed period as determined by the borrower.
HECM Requirements and Costs
The requirements for HECM loans are similar to other reverse mortgages: homeowners must be over 62 years of age and either have their current mortgage paid off or paid down by a considerable amount. Homeowners must also maintain their home as a primary residence in order to qualify for the program. In addition, homeowners must not be delinquent on any federal debt.
Another unique requirement for HECM loans is mandatory counseling in a consumer information session. HECM counselors will not only discuss eligibility requirements and provisions for loan repayment but also the financial effects of a HECM loan and alternatives for those who would be better served by other means of funding. HECM loans also come with a number of fees and service charges. However, most of the costs associated with a HECM loan can be taken care of through the proceeds of the loan itself. As a result, older adults do not have to handle these costs out-of-pocket. These fees and charges include both initial and annual mortgage insurance premiums, an origination fee, various service fees, third-party charges and interest on the loan itself.
The origination fee is usually the most expensive of those levied. Lenders will charge this fee as compensation for processing the HECM loan. Origination fees can range from up to $2,500 for homes valued at less than $125,000 to two percent of the first $200,000 of a home's value plus one percent of any amount over $200,000. Borrowers should remember that these origination fees are capped at $6,000.
Questions to Ask Before Using Home Equity
For older adults, using home equity to help cover long-term care costs is not something that should be taken lightly. Before going through with a HECM loan or any other type of home equity loan, borrowers should ask themselves the following questions:
- Does the homeowner want to utilize the equity in their home to pay for long-term care costs?
- Will the approximate value of the home help adequately cover care costs when taking on a reverse mortgage?
- What are the drawbacks and potential consequences of a reverse mortgage?
- What is the first thing that should be done to take care of long-term care costs after unlocking home equity?
Long-Term Care Insurance
The cost of long-term care can easily exceed a person's ability to pay. According to a recent MetLife Market Survey, the cost of a licensed practical nurse from a home care agency is approximately $37 per hour, while the cost for a home health aide is $19 per hour. Nursing home stays can also cost in excess of $70,000 per year in many areas. Medicare, Medicaid and other traditional health insurance plans may not cover most aspects of long-term care.
These high costs can be mitigated to an extent with long-term care insurance. Most policies not only cover a wide range of services offered at home or in facilities devoted to long-term care but also reimburse these expenses up to a predetermined amount. However, most-long term care insurance policies require the insured to have either severe cognitive impairment or the need for assistance with certain daily living activities, including dressing and bathing.
Long-Term Care Resources
National Care Planning Council
PO BOX 1118
Centerville, UT 84014
National Clearinghouse for Long Term Care Information
Administration on Aging
One Massachusetts Avenue NW
Washington, DC 20001
U.S. Department of Housing and Urban Development
451 7th Street S.W.
Washington, DC 20410
- Older adults and their families must deal with the costs of long-term care.· Unlocking the equity in one's home can help fund long-term care.
- Older adults can tap into their home equity with a reverse mortgage, as long as they meet specified requirements.
- FHA HECM loans can also give older adults access to home equity for long-term care costs.
- Long-term care insurance can also cover costs that Medicare, Medicaid and other private health insurance fail to cover.