As people age, the amount they spend on senior care often increases. The Bureau of Labor Statistics reported in 2020 that seniors aged 65 and up spend $6,668 per year on basic health care. Add on top of that the fact that at some point, many seniors aging in place at home will require assistance with daily living activities from a home health care company. Paying for this care can be challenging. According to Genworth’s 2021 Cost of Care Survey, the average national cost of home care ranges from $4,957 – $5,148 per month for 44 hours of care per week. While Medicaid and Medicare covers some of the costs of care, they don’t always cover everything. Some seniors cover the cost out-of-pocket, while others require additional resources like reverse mortgages.

A reverse mortgage is ideal for seniors at least 62 years of age who need help paying for health care or who want to supplement their income. This guide covers what reverse mortgages are and how they work when paying for senior care. It also identifies alternatives for those without a lot of equity in their homes or those who want other options.

Step 1: Consider the Benefits and Drawbacks of Reverse Mortgages

Reverse mortgages convert home equity into spendable cash for health care, senior care and other expenses. Unlike regular mortgages that require you to make monthly payments, the required monthly payments for a reverse mortgage are zero. Eventually, the loan must be paid back when you pass away, move out or sell, but for the time being, you can free up disposable income and manage expenses while in retirement. There are pros and cons to this type of loan.

Pros:

  • Allows seniors to age in place
  • Non-taxable income
  • Non-recourse financing
  • Quick money for those with home equity
  • Doesn’t affect Medicare or Social Security benefits

Cons:

  • Must be paid back upon selling
  • Interest isn’t tax deductible until the home is sold
  • Strict restrictions
  • Greater chance of foreclosure
  • Interest rates change over time

Step 2: Identify Alternative Options

Aside from reverse mortgages, there are several ways to cover the cost of senior care. Some seniors use more than one option to cover the entire cost, including public programs, private financing and personal funds. These options include:

Personal Funds

One of the most popular ways to pay for senior care is through personal funds. This includes savings, pensions, retirement, income from employment and the sale of personal property or a home. Personal funds can also come from family and friends. Personal funds are often used to cover things like transportation, meals and community-based services like arts and crafts, fitness and scheduled outings.

Government programs

Medicaid and Medicare are two of the most popular government programs that help pay for senior care. Both of these programs typically pay for medical care and treatments. Some states have the Program for All-Inclusive Care for the Elderly or PACE. PACE helps pay for home and community-based services. Other programs include veterans’ benefits, Social Security, Supplemental Security Income (SSI) and the State Health Insurance Assistance Program (SHIP), which is a national program that provides help with Medicare and Medicaid and can assist with Medigap.

Private Financing Options

Reverse mortgages are a type of private financing option. Others include long-term care insurance from private insurance companies, life insurance policies, annuities and trusts.

Step 3: Choose a Loan Type and Lender

When choosing the best reverse mortgage company, it’s important to shop around. Lenders can vary depending on the loan type, interest rates and customer service ratings and reviews. Loan types include:

  • Home equity conversion mortgage. The most common type of reverse mortgage, these are insured by the federal government through the Federal Housing Administration (FHA). At the end of the loan, if the loan amount exceeds the selling price of the home, FHA will assume most or all of the loss.
  • Proprietary reverse mortgage. Similar to home equity conversion mortgages, a proprietary mortgage doesn’t offer a government guarantee. The loan has fewer qualification restrictions, so it might be easier to obtain, but fees may be higher. Proprietary mortgages are also not available in all areas.
  • Home equity conversion mortgage for purchase. This type of mortgage is used to buy a new home.
  • Single-purpose reverse mortgage. With a single-purpose mortgage, the lender can restrict how you use the proceeds of the loan. For example, if you state you intend to use the proceeds for health care and later decide you need to make home repairs, the lender can refuse to pay for that.

Once you decide on the type of loan you need, choose a lender that offers this option. Then consider the customer service reviews and review the rules for the loan, including the minimum down payment and minimum FICO score and how this criteria compares with your situation.

Step 4: Decide if a Reverse Mortgage is Right for You

A few basic steps can help you decide if a reverse mortgage is right for your situation. You should:

  • Understand the basic eligibility requirements. You must be at least 62 years old, currently use your property as your main residence and have at least 50% equity in your home.
  • Meet with a HUD-approved loan officer to discuss your available options.
  • Receive recommendations and compare multiple lenders.
  • Discuss the option with loved ones who understand what will happen to the property once you pass or move into a residential care facility.

FAQs


What are the benefits of a reverse mortgage?



A reverse mortgage provides a significant source of income for those who choose to age in place for as long as possible.


What are your personal obligations with a reverse mortgage?



Seniors who choose a reverse mortgage must pay all property-related expenses on time and in full, including property taxes, HOA fees, utilities and insurance premiums. The property must be kept in good condition or the same condition as when you took out the loan, and it must be used as the primary residence.


What if I don’t pay home expenses or keep my home in good repair?



Borrowers who fail to maintain their property typically are in default of their loan. Lenders can demand the balance of the mortgage be paid in full. 


Can I still leave my home to appointed beneficiaries?



Beneficiaries are still allowed to take ownership of the property as long as the reverse mortgage debt is paid in full.


What if the sale of my home isn’t enough to cover the loan?



The Federal Housing Administration (FHA) insures most reverse mortgages and will pay the amounts not covered by the home sale.


Can I add an additional borrower to a reverse mortgage loan?



Reverse mortgages don’t allow for a co-signer.