The majority (76%) of those over 50 say they would prefer to continue living in their own home as long as they can. However, this is not always possible, and other senior living options like assisted living may need to be considered. Yet, such long-term care options can be costly. For instance, one year of assisted living can cost over $50,000. If memory care or skilled nursing is required, the annual cost can be twice as much.
Unless one has long-term care insurance or can qualify for Medicaid, most people will need to tap all their assets, to pay for long-term care. This may include the equity in one's home.
There are four ways to leverage home equity to finance long-term care:
Selling may not be feasible if a spouse or other dependent lives in the home or the seller plans to return to the residence. Otherwise, if selling the house makes sense, there are some details to keep in mind.
Prepare for a Long Sales Process
Prepare for a long sales process. Even though the U.S. home sales market has been hot in recent years, homes that require a lot of updating or repairs may take some time and cost to prepare for sale.
Selling "As-Is"
There is the option of skipping repairs and updating to selling the home "as is." This spares the homeowner from the hassle and cost of making updates and repairs. The major downside of this approach is lower profits. The homeowner needs to assess whether cost savings offset the lower asking price. It may be wise to consult a trusted realtor to conduct this analysis.
Be Aware of the Impact on Medicaid Eligibility
Medicaid pays for long-term care once a person's assets have reached a low enough level. If a homeowner lives in the house, it is exempt in determining Medicaid qualification. However, as soon as it is sold, the proceeds are included in Medicaid eligibility calculations. In that case, a person who previously qualified for Medicaid would not be eligible again until those home sale dollars are spent down. More details about using Medicaid to fund long-term care expenses are covered in the Cantissimo Senior Living blog, The Safety Net: Paying for Long-term Care With Medicaid.
Originating in the 1960s, reverse mortgages skyrocketed in popularity as a tax-free way to pay for long-term care costs. In a regular mortgage loan, the borrower pays the lender. In a reverse mortgage, the lender pays the homeowner. This type of loan can be an excellent way to tap equity tied up in a home. However, there are essential details to keep in mind.
Even for a borrower who owns a home free and clear, the loan may not be for 100% of equity since the lender aims to ensure that the value of the collateral (the home) will be sufficient to repay the loan in the future. The amount of money available from a reverse mortgage depends on several factors:
Reverse mortgages are complex financial arrangements. Therefore, potential borrowers need to carefully compare loan options, fees, and interest rates from multiple lenders to find the best loan features and lowest interest rate.
Like a reverse mortgage, a home equity line of credit (HELOC) allows homeowners to borrow against home equity. The bank usually structures a HELOC loan for a certain amount of money over a specified period. The homeowner can borrow against this amount as needed to pay for long-term care costs. Unlike a reverse mortgage, however, monthly repayments toward the amount borrowed begin immediately. Also, missing payments may result in foreclosure. Finally, approval of a HELOC is more dependent on a borrower's credit score than for a reverse mortgage.
Despite these limitations, HELOCs have definite advantages. Fees tend to be lower in comparison to reverse mortgages. Also, there is no requirement that the borrower lives in the home. This can benefit those who need to move to a senior living setting but do not want to sell their home. Additionally, for those under 62, a HELOC has no age limitation.
Potential borrowers need to carefully assess their own situation when comparing HELOCs and reverse mortgages to determine which makes the most sense for their situation.
The monthly income from renting a home could help cover long-term care expenses. However, like the other alternatives discussed above, careful analysis must be undertaken before becoming a landlord.
Leveraging the equity in a home can be an intelligent way to help finance long-term healthcare costs. However, the method for doing this requires thoughtful assessment to ensure it meets the homeowner's specific needs.
This is the third part of our blog series about options for paying for long-term care. To be notified of upcoming posts, subscribe to our blog!
To learn about additional options for affording long-term care, download the eBook, "Planning and Paying for Long-Term Care: What Are My Options?"
Visit our Long-term Care Resources page for more helpful content about planning for care!