Attempting to predict precise long-term care costs can be a futile endeavor. Aside from the fact that it's impossible to know what type of care you'll need and when, the price of long-term services and support varies widely depending on fluid factors ranging from labor supply and demand to regional costs of living. One tactic to which seniors are turning to cover their long-term care planning bases? Reverse mortgages. Let's take a look at this trend, along with highlighting some pros and cons of this increasingly popular approach.
Understanding all of your long-term care planning options means reading the fine print.
The 411 on Reverse Mortgages
Reverse mortgages are a type of home equity loan which allows borrowers to receive cash against the value of their home while maintaining ownership. This can typically be done through several different methods, including receipt of a lump-sum payment, monthly payments, or a line of credit.
After securing a reverse mortgage, borrowers retain both title and ownership over their homes while continuing to live in them. They are also still responsible for repairs, insurance, and property taxes. The payments received are not taxable and do not impact your social security coverage as long as they are spent within the month they're received. The loan becomes due only when the last borrower permanently moves, sells the home or dies.
While there's no income or credit history required in order to be eligible for a reverse mortgage, this special type of loan does come with specific qualifications. Borrowers must be aged 62 or older and use the home as their primary residence. Unlike other types of loans, loan amounts are not valued on home value or lending limits, but instead upon the age of the borrower. Once approved, borrowers are free to use the loan for any expense, including long-term care.
Planning ahead = peace of mind.
Pros and Cons of Reverse Mortgages for Long-Term Care Planning
While there's no clear-cut right or wrong answer when it comes to planning for long-term care, evaluating the pros and cons can help you get a better picture of what a reverse mortgage can do for you.
Pros of Reverse Mortgages:
- Borrowers can choose the best payout option for their needs.
- As long as borrowers fulfill their loan terms, they can live in their homes and maintain ownership while receiving funds.
- Money received will not typically impact social security.
- Borrowers will never owe more than the loan amount — even if a home's value declines.
- Loan proceeds aren't taxable, and borrowers can continue to make loan payments without incurring prepayment penalties.
- Borrowers enjoy financial relief while also potentially sparing family members the burden of providing or paying for their long-term care needs.
Cons of Reverse Mortgages:
- While qualifying is less rigorous than for conventional loans, borrowers must have ample home equity to be eligible. Additionally, there are other fees and upfront payments associated with taking out a loan.
- Vacation homes and investment properties are ineligible.
- Reverse mortgages require a lien to be placed on the home thereby eliminating outright ownership.
- While there are no mortgage payments, borrowers will still pay taxes and insurance.
- Upon the borrower's death, adult children assume responsibility for paying off the loan which may impact their inheritance.
A financial planner can help you make sense of your options.
Because reverse mortgages are not one-size-fits-all, understanding whether one is right for you or your aging loved one can feel like tricky territory. While discussing the issue with your spouse and close family members is essential, another entity can also play a valuable role in helping you make the most informed decision. A financial or estate planner offers useful legal and financial help for seniors during the long-term care planning process as well as in a number of other critical senior care matters.