Potentially significant and unexpected costs of health and in-home care may be paid more efficiently using home equity to avoid depleting family savings.

Achieving and maintaining financial security throughout retirement continues to be the number one concern among financial advisors and their aging clients.  Add to this the reality that one of every three individuals age 65 or older, will require some form of long term health care services, creates a major challenge to family finances.

Without question, the preference of older homeowners is to remain at home and utilize in-home care as opposed to going to a nursing home or long term care facility.  Unless covered by long term care insurance, which too few have, the costs of in-home care must be paid by the family as Medicare and Medicaid, for the most part, do not cover these costs.

In-home care costs vary widely based on the nature and level of service needed.  Steve Stern, owner of First Light Home Care, Needham, MA, a prominent in-home care service provider in the Greater Boston area, advised that typical monthly charges range from a low of two to three thousand per month to 12 to 13 thousand per month. 

Clearly, this can be an obstacle for most households as the amount and duration of these expenditures are difficult to project.  Medical needs tend to change and increase over time, potentially requiring more service and equipment costs.

One often overlooked financial resource to pay these costs is a reverse mortgage.  Reverse mortgages enable accumulated home equity to be converted to cash without selling the home, or taking on the burden of making monthly payments.  Home equity, the largest single asset of most families, is a valuable resource that, properly used, may increase and extend financial capabilities and long term security. 

Since the Great Recession (2008-2013), real estate values rebounded increasing home values in many areas, thus growing the potential for older homeowners to access greater amounts of cash.  At this time, the only reverse mortgage program available in Massachusetts is the HUD/FHA insured Home Equity Conversion Mortgage (HECM) reverse mortgage.

The HECM reverse mortgage was developed and approved by Congress to enable owners 62 and older the ability to use a portion of their home equity to increase cash flow and liquidity.  HECM features, guaranteed as long a loan remains in good standing, include:

• No monthly payment obligations – prepayments are permitted without penalty but not required. Monthly charges are deferred and accrue.
• No maturity date – repayment not required until no borrower resides in the property.
• Non-Recourse loan – neither borrowers nor heirs incur personal liability. Repayment of loan balance can never exceed the property value at the time of repayment.  If loan balance exceeds property value at time of repayment, the lender and borrower(s) are protected by FHA insurance.
• Credit line growth – the undrawn balance of the credit line grows (compounding monthly) at the same rate charged on funds borrowed.
• Funding and loan terms are guaranteed – cannot be frozen or cancelled as long as the loan remains in good standing.
• Borrower obligations (to keep loan in good standing) are limited to:
  • Keeping real estate taxes, liability insurance, and property charges current
  • Providing basic home maintenance
  • Living in the property as primary residence

Selling and Relocating to a More Suitable Home

For others, it may be time to consider selling the home and relocating to a more suitable home to increase savings, move closer to relatives or friends, or perhaps move to a more favorable climate.  Generally, two housing options are available – rent or buy.  Renting enables the sellers to increase savings from the sale proceeds to accommodate the new lifestyle.  Buying requires the reinvestment of home sale proceeds to purchase for cash, or finance a portion of the purchase price with a new mortgage.

Purchasing a House or Condominium with a HECM Reverse Mortgage

In many cases, the new home may be a more suitable house or a condominium.  To avoid the burden of monthly payments (or if the buyers do not qualify for traditional mortgage financing under new, more stringent qualifications) they will purchase for cash.  The problem with a cash purchase is that it depletes significant funds that otherwise might be available to increase savings.

The HECM reverse mortgage may provide a better solution.  Consider the benefit of purchasing with a down payment of approximately 50 percent versus 100 percent cash.  Financing the balance with a reverse mortgage does not require any loan payments, and enables the borrower to increase savings by the other 50 percent for future needs.