From day to day expenses to the cost of formal care options, aging can come with expected and unexpected costs that require a strong financial standing. The uncertainty of these costs can result in stress and anxiety for families as they prepare for retirement and older adulthood.
People likely don’t know how much, if any, assistance they will need in the future, and there may be a concern of outliving their funds. Many families seek to explore options for additional income, such as a reverse mortgage.
The most common type of a reverse mortgage is called a Home Equity Conversion Mortgage (HECM)– specifically for individuals over the age of 62. Contrary to a traditional mortgage, a HECM is great for someone who has substantial equity in their home and needs some additional income to fund their retirement.
A reverse mortgage works the opposite of a standard mortgage. Rather than making regular payments to a bank against a loan to buy ownership in a house, a homeowner would receive either a lump sum of cash or monthly payments from a bank as a loan in exchange for ownership of the house. Your loved one would remain the owner on the deed of the home, while slowly selling the equity of the home back to the bank. The money generated from a reverse mortgage can be used for anything including:
Monthly payments can be great help in covering day to day expenses and even care options. However, if received in a lump sum (all at once), a reverse mortgage may also give your parents’ the funds they need to purchase a new home, especially if they are seeking to downsize.
For some, a reverse mortgage can be the key in allowing a parent to age in place successfully.
First, there may be some fees associated with the initial borrowing of the loan. While the HECM does not impact someone’s ability to receive Social Security or Medicare, the additional income may impact their ability to receive Medicaid. This may not present as an immediate issue, but should your parent need nursing home care, they may be in a position of needing to pay privately.
This could make it challenging if you anticipate that your parent may require nursing home level of care in the future. A nursing home level of care might include things like:
Reverse mortgages are paid back when the home is sold, the homeowner moves out for a period of time, or the homeowner passes away. It’s important to note that the family or estate would still be responsible for repaying the loan through the sale of the home, even if the original borrower passes away, regardless of who else is living in the home at that time.
Assuming one parent acts as the borrower, it is important to understand what the impact on any other residents of the home will be, including spouses, should the borrower move (for example, to a nursing home) or pass away. The other resident of the home will generally have a year to sell the home and repay the loan.
Reverse mortgages are generally beneficial for individuals or couples when both are in good health. They may also be a good fit for couples where one spouse is in good health and the other may have some challenges. In the event of the ill spouse passing away, the well spouse could sell the home, repay the loan, and likely have funds for future care.
Making a decision to take out a reverse mortgage can require a lot of thought and contemplation of the larger picture. Adding to that, it’s not always easy to have conversations about long term care. You’ll want to be able to answer questions to guide you in your decision making:
For many seniors, a reverse mortgage may be the key to financing care at home, but it’s important to have a complete picture of what this will look like for future planning.