Using a Home to Pay for Elder Care
Today, many elderly Americans who cannot afford the ongoing cost of home care, assisted living or nursing home care are faced with the decision of whether to use their homes as a source of funding to pay for care. As many seniors have significant equity in their homes and since traditional Medicare does not pay for assisted living or personal care at home, using one’s home to finance long-term care can be a good option. And sometimes it is the only option.
While there is more than one way to generate revenue from a home to pay for care, not every approach is appropriate for all seniors or necessarily a sound economic decision.
The four relevant options are renting the home, selling the home, getting a reverse mortgage, and getting a home equity line of credit. However, each of these options is not available to all homeowners. The best course of action depends on one’s family situation and in what location one will receive care.
Selling the Home
Obviously, selling a home to pay for care is not an option applicable to everyone. Most notably, it is not relevant to those individuals who wish to continue living at home and receive home care. However, for individuals or couples who are moving into assisted living or nursing homes and have no intention of returning to their homes, this option can make financial sense.
The benefits of a home sale are numerous. The proceeds can be used to cover the moving and move-in costs for assisted living. Paying off any outstanding mortgage will reduce monthly expenses as will the lack of home maintenance costs. Once the home is sold, the homeowners or their family members no longer have to manage the logistics of owning or renting a home.
The large sum of money generated by a home sale has both positive and negative consequences. Obviously, the money can be put in the bank and used to pay for assisted living or nursing home care for many years. However, since life expectancies are unpredictable, this money may run out eventually. One option to prevent running out of money is to buy a lifetime annuity with the proceeds of a home sale. A lifetime annuity guarantees a monthly income for one or both spouses for the rest of their lives regardless of how long they live.
One potential negative consequence of selling the home is the impact on Medicaid eligibility. If one is considering Medicaid as a possible source of funding for nursing home care in the long term, they need to carefully consider the implications before selling their home. A home, when occupied by the homeowners, is considered an exempt asset by Medicaid. However, if the home is sold, the resulting sum of cash is not considered exempt by Medicaid. Therefore, the individual will be required to spend nearly all of the proceeds on their care costs or “spend down” in another manner that does not violate Medicaid’s look back rule, which if violated, results in a period of Medicaid ineligibility. Once one’s total assets have been spent down to Medicaid’s asset limit, which, generally speaking, is $2,000, they can become eligible for Medicaid. Seniors and couples in this situation should strongly consider consulting with a Medicaid planning professional.
Another consideration when selling the home is how to pay for care in the time it takes to sell a home. According to Zillow, as of 2018, it takes on average 2 to 3 months to sell a home. While obviously this depends on the local real estate market, it is worth noting that homes that have not been modernized take even longer than average to sell. Most homes owned by seniors have not been modernized. Fortunately, there are eldercare loans designed specifically to help seniors fund residential care while they are waiting for their homes to sell. Learn more about eldercare loans here.
Renting the Home
Renting a home to pay for care instead of selling it only makes sense if the house is paid off or the mortgage payments are very low.
Renting one’s home and using the monthly income to help offset the cost of residential care is a very good option. It can provide cash on an ongoing basis, but only if many other conditions are met. Obviously, the individual(s) in need of care cannot live in the home. Therefore, it is only appropriate for persons going into residential care, be that assisted living or a nursing home. Furthermore, it only makes sense to rent the home instead of selling it if the mortgage is paid off or if the monthly payments are very low. To make sense, one’s rent money will have to cover the mortgage and any home maintenance, as well as a significant portion of the cost of their long-term care. It is also challenging for elderly individuals in residential care to play the role of landlord. Usually there needs to be another family member willing to take on this responsibility or there is another added expense of a property management company. Another consideration is whether the homeowner has enough savings to withstand the interrupted cash flow of an unexpected tenant vacancy.
Given all these conditions, there is a limited set of people for whom home rentals are a good way to pay for care. It is usually a good option if one or both spouses intend to return to living in the home after some period of time. For example, sometimes when one spouse is ill and the other in good health, both spouses may choose to move to an assisted living residence. The ill spouse may eventually pass away, or it may be medically necessary to move to a nursing home. At which time, the healthy spouse may wish to return to living in their home. Couples with higher value homes that can command a good deal of rent are better suited for this option as well. This is because the income can make a significant contribution toward the cost of care, and higher value homes tend to attract more stable tenants.
Renting a home may be an option for those considering Medicaid, but it can be a tricky situation.
Renting a home is not always a good option for those who are considering Medicaid as a possible source of financial assistance for long-term care. This is because the rules allowing a Medicaid recipient to rent out their home varies based on the state in which one lives. As an example, in some states, part of the home’s equity value may count toward Medicaid’s asset limit and / or rental payments may count towards Medicaid’s income limit. This means renting out the house could potentially cause one to be ineligible for Medicaid.
In summary, renting a home is best for couples in mixed health, or of mixed ages that will require residential care for a defined period of time with the intention to return home in the future.
As with renting or selling one’s home, using reverse mortgages as a source of funding for senior care can make economic sense in certain defined situations. Before a more detailed discussion of these situations, it is helpful to state certain facts about reverse mortgages.
Many individuals think of reverse mortgages as loans that never need to be repaid since they are drawing against their home equity. However, this is not entirely accurate. Reverse mortgages become due when the last individual on the agreement passes away, moves away from their home for a period of more than one year, or when the home is sold.
There is also more than one type of reverse mortgage. For the purposes of this article, when discussing reverse mortgages, we are referring to the HECM (also called Home Equity Conversion Mortgage). In the majority of cases, this type of reverse mortgage makes the most economic sense for the homeowner(s) wishing to use the proceeds to pay for senior care related expenses.
Because of the legal requirement that at least one individual who co-signs a reverse mortgage agreement must live in the home, reverse mortgages are not appropriate for couples in every situation. Single or widowed individuals or couples in which both spouses are in poor health and require (or may soon require) residential care in assisted living or a nursing home are not good candidates for reverse mortgages.
Couples or individuals in good health, and couples in which one spouse is in good health, are strong candidates to receive the benefits of a reverse mortgage. This is because it is very likely families in these situations will remain living in their homes for many years to come. Therefore, their reverse mortgages will not become due.
For single individuals in moderate health who wish to pay for home care with the proceeds of a reverse mortgage, the decision is more difficult. One must estimate the number of months and years they can continue to live at home and receive care in that location. Should it be estimated the individual’s health may make a permanent move to residential care necessary within 24 months, a reverse mortgage probably does not make economic sense. However, should it be estimated, they can remain living at home for 3 or more years, it might well be a good decision.
Reverse mortgages can be paid out in a single lump sum, as a line of credit, or as guaranteed monthly income for life.
Home Equity Line of Credit or Home Equity Loan
Often abbreviated as HELOCs, home equity lines of credit give homeowners the option of borrowing to pay for care on an as needed basis. A bank will approve the homeowner for a specific amount of money for a certain period of time. The homeowner can borrow however much they require whenever they require it. And the monthly payments are dependent on how much they have borrowed.
There are certain advantages and disadvantages to HELOCs, especially when considered in comparison to a reverse mortgage.
The disadvantages include the fact that the homeowner must continue to make monthly payments. This is not the case with reverse mortgages. If one fails to make their payments, the home can be foreclosed. HELOCs do not have the same level of consumer protection as do reverse mortgages. Finally, as monthly payments are required, the borrower’s credit score plays an important part in the approval process. With reverse mortgages, credit scores are considered significantly less important.
The major advantages of a HELOC are:
The fees are generally lower for a short-term loan than they would be for a reverse mortgage.
There is no requirement that the homeowner remain living in their home. This is, of course, a very important consideration for persons who may need to move to assisted living or nursing homes at some point in the future.
One must apply these advantages and disadvantages to their specific situation to determine if a home equity line of credit is a good source of funding to pay for elder care. Generally speaking:
Single individuals and married couples in good health should probably avoid a HELOC as a means of paying for care as their need for care is undetermined at present.
Individuals with immediate care needs or couples in which both spouses require care are candidates for HELOCs because there is no requirement that they remain living at home. Should it be necessary for them to move into residential care, they can do so without concern that their HELOC will become due. A line of credit also gives them the flexibility to accommodate sudden increases in their monthly expenses due to the added cost of residential care. The line of credit also gives the flexibility to return to living at home should one’s health allow for it or provide a source of funding for care while determining if the home should be sold.
For couples in which only one spouse requires care, both HELOCs and reverse mortgages can be good options. One needs to consider the extent and duration of the care required. However, reverse mortgages are not available to couples in which one spouse is under 62 years of age, while this does not hold true for HELOCs.
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