Should You Use a Reverse Mortgage to Pay for In-Home Care?

Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, according to the Department of Health and Human Services, and many don’t have the savings to manage the cost of assisted living. But they may have a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.

Here’s how to evaluate whether a reverse mortgage might be a good option.

Advantages of a reverse mortgage to fund in-home care

Your home is generally one of your biggest assets, and using its value to handle long-term care costs can make sense.

  • You’re tapping an “up” asset. “Most people will find that their home is the only asset they own appreciating this year, and that makes it a good source to utilize for income needs,” says Byrke Sestok, a CFP in Harrison, New York.
  • You can lock in value. If you think you’ll have trouble covering a future long-term care need, you can get a reverse mortgage now, when home values are high. An unused line of credit grows over time, so your balance will have increased by the time you need the money.
  • The income is tax-free. All money you withdraw from your reverse mortgage line is tax-free, and it doesn’t affect your Social Security or Medicare benefits.

Beyond potential implementation of a reverse mortgage, there are seven other critical decisions that should be made in the decade preceding retirement, according to the column. These include laying out a general plan for your life; determining exactly what your needs will be based on assets and living situation; refocusing your assets and income on yourself and/or your spouse if supporting children; and avoiding major life changes which can be particularly disruptive in the decade preceding retirement.

Disadvantages of a reverse mortgage

Reverse mortgages can solve a problem, but there are downsides to using the equity in your home to cover costs.

  • They Cost More than a Conventional Loan because they are insured by FHA Getting a reverse mortgage costs about as much as getting a traditional mortgage —For safety purposes however there is an insurance cost, a reverse mortgage is insured by FHA However, you may roll most of the costs into the loan.
  • You will owe interest when the home is sold. Interest accrues on any portion you’ve used, due at the time the home is sold, the advantage to a reverse mortgage is there are no monthly mortgage payments.
  • You’ll leave less to heirs. The more of your reverse mortgage you use, the less you’ll be leaving behind.

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This article was written by NerdWallet and was originally published by The Associated Press, annotated for brevity.

About the author: Kate Ashford is a personal finance writer at NerdWallet specializing in Medicare. She has more than 15 years of experience writing about personal finance.