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Health care information and caregiving marketplace website Care.com published an article that examines several “practical” ways that someone could choose to finance their long-term care (LTC) goals. Reverse mortgages were included in the assessment alongside options like Medicaid, Medicare, health savings accounts (HSAs), veterans benefits, LTC insurance and home equity loans.
The reverse mortgage industry has aimed in recent years to position itself as a potential avenue to fund LTC directly or pay for LTC insurance. The Care.com editorial team took stock of the product requirements and its various pros and cons.
“The loan can be paid out in monthly installments or as one lump sum,” the article explained. “The borrower can then spend it however they like, including long-term care costs or home modifications to make aging at home more feasible. The loan is due in full once the borrower has stopped living in the home for a full year or when they die.”
The article also mentions provisions for non-borrowing spouses, saying that married couples “typically sign the reverse mortgage together, so repayment is due upon the surviving spouse’s death or move-out anniversary.”
Among the potential pros for readers to consider, the article mentions that reverse mortgages — and Home Equity Conversion Mortgages (HECMs), specifically — could provide “an appealing alternative to downsizing, because it allows you to tap home equity without having to leave your home.”
The articcle also points out that even if the housing market is turbulent, HECM borrowers will never owe more than the home is worth, owing to the loan’s nonrecourse feature backed by Federal Housing Administration (FHA) insurance.
Since the loan proceeds are not income, they are not subject to income taxes despite the requirement that borrowers remain current on their property taxes, homeowners insurance and (if applicable) homeowners association (HOA) fees. HECM proceeds also do not impact eligibility for Medicaid or Supplemental Security Income (SSI), which are measured based on income and assets.
As far as potential cons, the publication cites criticism of HECMs “for their high closing costs and interest rates that tend to hover 1% or more above traditional mortgages.” It also mentions generally complex loan terms that could be a barrier for some people who could otherwise be receptive to the product.
Because of these terms, “you’ll want to make sure you understand all scenarios before you sign any paperwork,” the article explained.
Finally, for some eligible HECM borrowers, Care.com contends that “downsizing to a smaller home may make more sense.” This could be particularly true if someone is worried about meeting the aforementioned obligations of property taxes, utility bills or home upkeep as they grow older.
