Home Equity Loans
Home equity loans allow homeowners to access the wealth tied up in their home's value without selling. Many homeowners use home equity loans to cover the cost of renovations but home equity loans don't have to be used for home-related expenses. In fact, there are very few limitations on how the money from a home equity loan can be used.
There are three main types of home equity loans: traditional (fixed-rate) home equity loans, home equity lines of credit (HELOCs), and reverse mortgages. Each has its own unique advantages. If your loved one requires long-term care planning but does not wish to sell his or her home, a home equity loan may be able to help fund the cost of his or her care.
Types of care
Home equity loans can be used to pay for virtually any type of long-term care, from residential nursing home care and assisted living to in-home and adult day care. Home equity loans can be a particularly good option for those who intend to continue living in their home for the foreseeable future, but who require medical and/or nonmedical assistance on a regular, ongoing basis.
According to a recent study conducted by the American Association of Retired Persons (AARP), approximately 90 percent of seniors (people aged 65 and above) wish to continue living in their own homes as they age—a process often referred to as “aging in place.” Approximately 82 percent of respondents said that even if they eventually require skilled nursing or assistance with activities of daily living (ADLs) like dressing, bathing, eating, and toileting, they would still prefer to continue living in their own homes.
While aging in place is not always possible (for example, those with late-stage Alzheimer's disease often require round-the-clock memory care), many seniors are able to avoid or delay moving into a residential long-term care facility like a nursing home or assisted living facility and continue living in their own homes while receiving the non-medical home care they need with in-home care.
If your loved one requires ongoing assistance or care but does not wish to move out of his or her home, in-home care may be a good option. Providers differ in the nature and scope of the services they provide, but most provide some combination of the following:
- Assistance with activities of daily living (ADLs) like dressing, bathing, eating, and toileting
- Assistance with instrumental activities of daily living (IADLs) like housework, medication management, and preparing meals
- Transportation to and from appointments
- Nursing and
- Companionship and socialization
While in-home care is generally more affordable than residential long-term care planning, most seniors find that they do not have sufficient income or savings to cover the cost of care for as long as they need it.
Adult day care
As previously discussed, the majority of seniors wish to continue living in their homes as they age, even when they need assistance with daily needs and activities. Although some people are able to remain in their homes, receiving in-home care when necessary, this is not always possible.
Many seniors who require daily assistance live in their home with a spouse, child, or other loved one who is able to help them with their needs. However, since it is often not possible for a caretaker or loved one to be at home all the time (particularly if the primary caregiver works outside the home), adult day care can be a good option for many people.
Like in-home care, those who attend adult day care are typically able to remain in their homes or live with a loved one and attend adult day care during certain hours of the day. Adult day care provides assistance with activities of daily living (ADLs) such as bathing, eating, dressing, and toileting, in addition to offering socialization for seniors who may otherwise be alone during the day. Adult day care centers generally operate during regular work hours, although many centers also provide weekend and evening hours for those whose caregivers may not be available during these times.
Every adult day care center is different in terms of the specific services offered and populations served, but there are three primary types of adult day care:
- Social adult day care – focuses on providing social and recreational opportunities and activities
- Adult day health care (ADHC) – can typically accommodate those with substantial medical needs and serious medical conditions and provide both social opportunities and skilled nursing services
- Alzheimer’s disease and dementia adult day care – can meet the needs of those who suffer from Alzheimer's disease or other dementias and typically offer social opportunities, skilled nursing services, medication management, and additional security
As previously discussed, home equity loans are often a good option for those who are able to remain living at home and do not wish to sell their home to pay for qualified long-term care. Since many seniors who attend adult day care are able to live at home with a spouse, child, or other caregiver and only require adult day care during the day or on certain occasions, home equity loans may be a good option for those who require assistance paying for the cost of adult day care.
Although most seniors would prefer to continue living at home for as long as possible, in some circumstances this is not possible, either in the short- or long-term. For those who require round-the-clock professional assistance or supervision, extensive skilled nursing services, or added security due to physical or cognitive impairments, residential care may be necessary.
Although in many cases seniors use home equity loans (and reverse mortgages in particular) when they are still living in their homes, some home equity loans may also be used by those who require long-term residential care but do not wish to sell their home.
There are a variety of reasons why a senior may not wish to sell his or her home, even when he or she moves into a community-based care facility, such as residential care, including the following:
- He or she anticipates the possibility of moving back home at some point
- A spouse, child, or other loved one is currently living in the home
- He or she anticipates the home increasing in value substantially in the future
- It is important to him or her that his or her children or other loved one eventually inherit the home
- The home has sentimental value and it would cause great stress or grief to part with it
For seniors who require residential care, but do not wish to sell their home or rent it out to help cover the costs of long-term care, a home-equity loan may be an ideal option.
There are a variety of types of residential care options, and each individual long-term care facility or community offers a unique set of services and amenities. In addition, each community will have its own particular culture, so it is important to carefully consider your loved one’s unique needs and preferences before deciding on a residential care type or provider.
Some of the most common types of residential long-term care are listed below. Please visit the associated links to learn more about each care type:
- Independent living communities – typically designed for seniors who are relatively independent and wish to live alone or with a spouse, requiring little help with activities of daily living (ADLs), and generally provide social and recreational opportunities and a variety of services and amenities
- Assisted living facilities – provide assistance to seniors who can no longer live independently and require help with activities of daily living (ADLs), medication management, and other daily needs and activities
- Memory care units – designed to address the unique and specific needs of seniors with Alzheimer’s disease and other dementias, typically providing added security, higher staff-to-patient ratios, and additional help with daily activities
- Nursing Homes – typically provide a mix of non-medical custodial care—including help with activities of daily living (ADLs)—and healthcare services, including medication management and appointments with a visiting physician
- Continuing care retirement communities (CCRCs) – provide a tiered approach to long-term residential care (often referred to as a “continuum of care”), allowing residents to move from one level of care to another as needs increase over time and with age
Types of home equity loans
As previously discussed, there are three basic types of home equity loans that can help you pay for the cost of healthcare. So which home equity loan is right for you or your loved? This will depend on a variety of factors, including the type of care he or she needs (in-home care, adult day care, or residential long-term care), whether or not he or she (and/or a spouse) plans to continue living in the home for the foreseeable future, the cost of care, his or her financial situation, and his or her ability to qualify for each type of loan.
Traditional home equity loan
A traditional home equity loan allows you to borrow a fixed amount of money against the value of your home. Because home equity loans are secured by your home (your home acts as collateral), they are often easier to qualify for than other types of loans. It is important to keep in mind, however, that this means that if you fail to make payments, your home may be at risk for foreclosure.
The amount of money you can borrow with a home-equity loan depends on a number of factors but typically cannot exceed 85 percent of your built-up home equity (the amount you have paid on your mortgage). Your creditworthiness and income also play a role in determining the amount of the loan.
Home equity loans generally have relatively low, fixed interest rates, and you repay the loan in equal monthly payments over a fixed period of time (typically 5 to 15 years). There are no restrictions on how you can spend the money you borrow using a home equity loan (there is no requirement that it be spent on home-related expenses), so using an equity release from your home to fund in-home care, adult day care, or some other form of long-term care is an option.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is another option for those looking to access the equity in their home without having to move out or sell. HELOCs offer homeowners a revolving line of credit and work similarly to a credit card. You can borrow on an as-needed basis and withdraw as much or as little as you need (by either writing a check or using a lender-issued credit card) so long as you do not exceed your credit limit. Interest rates are variable and, like a credit card, you are only required to make payments on the amount you actually borrow, not on the full amount of the loan.
Like traditional (fixed-rate) home equity loans, your home operates as collateral, and the amount you can borrow depends on a variety of factors, including the market value of your home, your built-up home equity, your income, and your creditworthiness. In most cases, the amount you can borrow with a HELOC cannot exceed an 85 percent loan-to-value ratio of your built-up home equity.
It is important to note that, unlike reverse mortgages, traditional home equity loans and home equity lines of credit (HELOCs) do not require that you live in the home, so these options can be used to pay for residential-long term care as well as in-home care or adult
Like traditional home equity loans and home equity lines of credit (HELOCs), reverse mortgages allow homeowners to access a substantial portion of their home equity without having to move out or sell.
The primary advantage of a reverse mortgage is that, unlike traditional home equity loans and HELOCs, reverse mortgages do not require you to make monthly payments during the life of the loan; instead, the balance of the loan becomes due when the borrower sells the home, passes away, or moves out of the home for a period of a year or longer.
The most common type of reverse mortgage—home equity conversion mortgages (HECMs)—are insured by the Federal Housing Administration (FHA), though they are given by private lenders. In order to qualify for a HECM reverse mortgage, the U.S. Department of Housing and Human Development (HUD) requires you to meet the following criteria:
- You must be 62 years of age or older.
- You must own the home outright or have a low balance left on your mortgage.
- You must use the home as your primary residence.
- You must have good credit.
- You must have sufficient income to be able to continue making timely payments on insurance, property taxes, and homeowners’ association (HOA) fees.
- You must participate in a consumer information session given by a HUD-approved HECM counselor, such as the American Association of Retired Persons (AARP).
Reverse mortgages are available with either fixed or adjustable interest rates. With fixed-rate reverse mortgages, you receive the proceeds of the loan as a lump sum. With adjustable-rate reverse mortgages, borrowers can choose to receive the money in any of the following ways:
- As a lump sum
- As a line of credit
- In fixed monthly installments
- As a combination of a line of credit and monthly installments
The amount you can borrow with a HECM reverse mortgage depends on a variety of factors, including your age, the interest rate, the value of your home, your built-up home equity, your income, and your creditworthiness.
For those that qualify, reverse mortgages can be an excellent option for seniors looking to leverage their home equity to pay for long-term care. However, due to the fact that reverse mortgages require you to continue living in your home, reverse mortgages only really make sense for seniors who plan to use a type of care that allows them to do so (like in-home care or adult day care) or who are moving into residential long-term care, but a spouse or other co-borrower plans to remain living in the home for the foreseeable future.
Other ways to pay for senior care
In addition to home equity loans, there are a variety of other options available to seniors who require assistance paying the high costs associated with long-term care. In addition to the options already covered, there are a couple of other ways that homeowners who require long-term care can use home equity to pay for the ongoing costs associated with their care.
One option for those who require residential long-term care such as assisted living, memory care or Alzheimer's care, or nursing home care is to sell the home and use the proceeds to pay for long-term care. If your loved one owns his or her home outright, as many seniors do, it is possible that a home sale may generate enough money to cover all of their long-term care costs, or at least a large portion.
For some seniors who are not able to continue living in their homes but who do not wish to sell, renting out their home and using the income generated by the rent payments of tenants to cover the costs of funding long-term care may also be a good option. It is worth noting, however, that if your loved one chooses to rent out his or her home, it may be necessary to hire a property manager or have a trusted loved one or family member manage the property.
Before your loved one decides to sell or rent out his or her home, it is important to consider how either option may affect his or her Medicaid eligibility. Since Medicaid is designed to help low-income individuals, most states have strict financial eligibility requirements. If your loved one’s assets or income are increased by a home sale or by renting out his or her home, it may disqualify him or her from receiving Medicaid payments until his or her assets have been spent down as long-term care costs are incurred over time.
Although many seniors who own their homes decide to leverage the value of their homes as a way to finance their long-term care, there are a variety of other options available to homeowners who do not wish to do so, or for seniors who are not homeowners.
Other options for financing long-term care include the following. Please visit the associated links to learn more about each item:
- Savings and other, non-residential assets
- Social security, pensions, and other retirement income
- Medicaid; learn about your state’s Medicaid program and waivers here
- Long-term care insurance
- Life insurance
- Veterans assistance, including the Aid and Attendance (A&A) benefit
Home equity FAQs
1. Are there age requirements for home equity loans?
It depends on the type of loan. Regardless of age, not everyone will qualify for every type of home equity loan. However, there are no specific age requirements for traditional (fixed-rate) home equity loans or home equity lines of credit (HELOCs). Your loved one may apply for these types of loans regardless of his or her age.
In most cases, in order to qualify for a reverse mortgage, a person must be at least 62 years of age. If your loved one plans to use a reverse mortgage to help finance the cost of funding long-term health care, it is likely this age requirement will not be an issue, since most individuals who require long-term health care services are over 62.
2. How much can I borrow?
The amount you can borrow with a home equity loan depends on a number of factors—including the lender and the type of loan—but, as a general rule, home equity loans typically cannot exceed an 85 percent loan-to-value ratio of your built-up home equity (the market value of the home minus the outstanding mortgage balance). For example, if your home is valued at $250,000, and your current mortgage balance is $100,000, you would likely not be able to borrow more than $127,500 against your home. Other factors that play a role in determining how much you can borrow include your income, your credit history, and any outstanding debts.
3. How do home equity loans impact Medicaid long-term care eligibility?
If your loved one currently qualifies for Medicaid assistance—or will qualify in the near future—it is important to consider how a home equity loan would impact his or her financial eligibility. In most cases, the value of your loved one’s home can be excluded from his or her net assets for Medicaid purposes, as long as he or she is currently living in the home; however, the proceeds from a home equity loan generally cannot. It is important to understand your state’s specific Medicaid financial eligibility requirements, and how a home equity loan would impact your loved one’s ability to qualify, prior to taking out a traditional home equity loan, home equity line of credit (HELOC), or reverse mortgage. Learn more about your state’s specific requirements here.
Proximity of care is very important when considering options
Research care options that are nearby when thinking about the next step for your loved ones.
Leona J. Werezak RN, BSN, MN is a registered nurse and adjunct nursing professor. She has 24 years experience working in a variety of healthcare settings including such remote locations as the Arctic Circle. Her research in early stage dementia was published in the Canadian Journal of Nursing Research and re-published in their 40th anniversary issue which showcased exceptional research published since the journal began. Her work in dementia care has also been published in the Journal of Gerontological Nursing. She currently teaches surgical nursing care on a thoracic/vascular unit to baccalaureate nursing students. Her clinical work with nursing students involves extensive work with older adults who have multiple chronic health conditions.