Reverse Mortgage and the Costs of Assisted Living

If you are an older person contemplating moving into assisted living, at the top of your list of concerns is paying for living in this type of community. Similarly, if you are the adult child of an older parent considering assisted living, you have the same primary concern. 

There are a number of ways in which the costs of assisted living can be paid. One possible idea is obtaining what is known as a reverse mortgage. Through this article, we discuss the circumstances in which a reverse mortgage can be used to pay for assisted living. 

Before diving into this discussion of using a reverse mortgage to pay for assisted living, an important caveat must be noted initially. There is a significant potential limitation when it comes to using a reverse mortgage to pay for assisted living. A reverse mortgage can be obtained only if a borrower remains living in the residence on which the loan exists. In other words, if you live alone and desire to move to assisted living (or if you have a parent in this position), you will not be able to obtain a reverse mortgage to pay for this type of long-term care. This caveat will be discussed in greater degree later in this article.

What Is a Reverse Mortgage?

 A reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit, according to Investopedia. Unlike a traditional home mortgage – also known as a forward mortgage a reverse mortgage does not require the homeowner to make any loan payments.

The entire loan balance, up to a limit, becomes due and payable when the borrower dies, moves out permanently, or sells the home. As is discussed later in this article, moving out means leaving the residence for a period of 12 months or more. If a person leaves for a shorter period of time, that doesn’t trigger the moveout provision in a reverse mortgage agreement. 

Federal regulations require lenders to structure the transaction so that the loan amount won’t exceed the home’s value. Even if it does, through a drop in the home’s market value or if borrower lives longer than expected, the borrower or borrower’s estate won’t be held responsible for paying the lender the difference thanks to the program’s mortgage insurance.

A Reverse Mortgage When One Spouse Needs Assisted Living

The most commonplace use of a reverse mortgage to pay for assisted living involves a situation involving a married couple when only one spouse needs this type of long-term care. One spouse is moving into assisted living and the second spouse will be remaining in the home. As long as one spouse remains in the residence, the moveout provision of a reverse mortgage is not triggered.

A Reverse Mortgage When a Person Living Alone Needs Assisted Living

A reverse mortgage is not the course to take in most instances when an individual lives alone and intends to transition to assisted living. One exception is if a person owns a home, has a considerable amount of equity in the home, and is going to be in assisted living for a period of time less than 12 months. In other words, that individual has a need to be in assisted living for a shorter period of time and has the intention to move home. 

Medicaid and a Reverse Mortgage

If a person is on Medicaid, a reverse mortgage likely is not a good course of action to take if that individual wants to remain eligible for this governmental program. Medicaid permits a person to own a home and an automobile without impacting eligibility for that program.

If a reverse mortgage is obtained, the proceeds from that loan can boost a persons financial resources above the point permitted for Medicaid. 

Medicaid provides an explanatory scenario:

If you take out a lump sum reverse mortgage and your proceeds are $10,000, any money that you retain after the month you received the proceeds will be considered a resource. So, if you get $10,000 as a result of your reverse mortgage proceeds, and you spend $7,000 of it that same month, the $3,000 that is left over will be added to your resources.

Sell Your Residence

If you will not appropriately qualify for a reverse mortgage as a financial tool to pay for assisted living, you may want to give consideration to putting your residence on the market for sale. Depending on the amount of equity you have in your residence, there can be tax consequences associated with the sale of your home. Therefore, you will want to consult with a tax accountant or a tax attorney when you contemplate the sale of your home to generate funds to be used to pay expenses associated with assisted living.