The United States is aging. Within two decades, the number of American adults 65 or older will hit 77 million — outnumbering children for the first time in history, the U.S. Census Bureau projects.
This booming older adult population is almost certain to increase the demand for health care, assisted living and long-term care. And that means figuring out a way to pay for it all.
Nursing homes typically cost between $225 and $250 per day, according to the U.S. Department of Health and Human Services. That adds up to $6,800 to $7,700 every month. Seniors staying in their homes can expect to pay $20 per hour or more for a health aide.
If you’re starting to plan for ways to fund long-term care options as you age, you should evaluate whether the equity you’ve built up in your home can help. Your years of paying down your mortgage can be a valuable source of cash after you retire, but there are plenty of caveats to consider before going that route.
How to Use Home Equity to Fund Long-Term Care
A reverse mortgage is a loan product specifically designed for Americans who are 62 or older to help them meet expenses during retirement while staying in their homes. It’s a type of home equity product that lets people access the equity of their homes, offering cash that can help you pay for long-term care as you age.
How it works: In a traditional mortgage, you make monthly payments to pay down the balance and eventually own your home free and clear. A reverse mortgage works in the opposite way. The lender gives you a lump sum of cash up front or a stream of monthly payments, with the balance increasing over time.
Besides hitting the age threshold, you must also live in the home as your primary residence. The amount you are eligible to receive will depend on how much equity you have in your home. Typically, you can borrow around 50% of the equity in your home, so if you own a $300,000 house that’s paid off, you can expect to receive about $150,000.
Interest will accumulate over time, and the balance will be settled when you pass away or move out of the home — typically by selling the property.
- No monthly payment. Instead of paying down the loan, you can receive money every month.
- You can stay in your home. With a reverse mortgage, you don’t need to settle up with the lender until you die or move out of your home.
- Tax-free cash. The income you receive from a reverse mortgage is tax-free.
- Harder to pass down your home. Typically, your home must be sold to settle the reverse mortgage, meaning you won’t be able to pass down the home to your heirs.
- High up-front costs. Reverse mortgages come with significant fees that eat into your equity.
- Debt increases over time. Since you’re not paying down the loan, your debt steadily increases.
Home equity loan
If you don’t live in one of the states with the best interest rates for reverse mortgages, (Utah and Wyoming take the cake with 4.56% and 4.66%, respectively) you may consider a traditional home equity loan to help pay for long-term care. These loans also access the equity in your home, but have several key differences.
How it works: In a home equity loan, lenders allow you to borrow money as a lump sum against the equity in your home. These loans typically run between five and 20 years, and you’re given a fixed interest rate and fixed monthly payments to repay the loan.
- Predictable payments. With a fixed interest rate, you know exactly what you’ll pay every month.
- You pay off the loan. This will help you pass down your home to your heirs if you would like to.
- You could lose your home. If you don’t make your payments, you could lose your home to foreclosure.
- You often need income to qualify. Lenders want to see enough income to repay the loan before offering a home equity loan. This can be a challenge for people in retirement.
A cash-out refinance is another type of home equity product that offers access to cash.
How it works: With a cash-out refinance, you replace your current mortgage with a brand-new mortgage for a larger amount than you currently owe. You receive the balance as cash. Your new loan typically must be worth 80% of the value of the home or less.
- Lower interest rates. Cash-out refinances typically come with lower interest rates than a home equity loan.
- Lump sum of cash. You will receive a lump sum you can spend as you wish, including on long-term care.
- Large closing costs. You’ll pay similar closing costs to a first mortgage, which can run thousands of dollars.
- Risk of foreclosure. If you fail to pay your new mortgage, you could lose your home.
- Harder to qualify for. Like a first mortgage, you’ll likely need to show income to qualify.
Alternatives to Using Home Equity to Fund Long-Term Care
Home equity products aren’t the only way to pay for your long-term care, and might not be right for you. You can also consider a few of the following strategies.
- Renting out or selling your home. If you decide that moving to a nursing home or assisted living facility is better than staying in your current home, you can use the income from renting out or selling your home to pay for it.
- Life insurance. Many life insurance policies have additional options, known as accelerated death benefits, which help you pay for long-term care if needed.
- Long-term care insurance. If you are still relatively young and in good health, you may consider long-term care insurance. With these policies, you pay in over time on a plan that will cover care expenses as you age. If you are already receiving long-term care services, however, you likely will not qualify.
- Medicare. This federal health insurance program for seniors can help bridge short-term gaps by paying for skilled, medically necessary care. However, this is typically not a good option for paying for long-term care.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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