Home Equity and Long-term Care

Making the decision to move a family member or loved one into long-term care services can be a complex and difficult one. For many families, the costs associated with paying for long-term care are a major concern. While Medicaid, social security, and long-term care insurance or life insurance can often help, many families find that these resources alone are not enough to cover the cost of long-term care planning. In many cases, the equity in older people's homes can be leveraged to help pay for the high costs associated with long-term care.

Paying for long-term care

According to research conducted by the U.S. Department of Health and Human Services (HHS) in 2015, more than half of all U.S. residents over the age of 65 will require some form of long-term care at some point in their lives. On average, HHS estimates that someone turning 65 this year will incur $138,000 in future costs related to long-term care over his or her lifetime.

The term “long-term care” refers to a broad range of services and supports intended to assist older people and those suffering from ongoing health conditions and disabilities maintain the best possible quality of life. As outlined by the Centers for Disease Control and Prevention (CDC), long-term care services may include the following:

  • Assistance with activities of daily living (ADLs) like bathing, dressing, eating, and toileting
  • Assistance with instrumental activities of daily living (IADLs) like medication management, housework, and preparing meals
  • Basic health care and/or nursing care services

There are a number of resources available to assist your aging family member or loved one in paying for long-term care, and it is important to make sure you explore all of these options prior to taking out a home equity loan or reverse mortgage on his or her home or selling the home outright.

Other ways to pay for long-term care include:

If your loved one owns his or her home and requires additional assistance paying for long-term care beyond Medicaid, retirement savings, and other resources, it may be worth considering a home equity loan or reverse mortgage or selling the home outright to help with long-term care planning.

Your loved one’s living situation and the type of care that he or she requires play an important role in determining whether or not home equity may be a good option to pay for care, as well as the manner in which home equity may best be leveraged (i.e. reverse mortgage, traditional home equity loan, renting, or selling).

Factors to consider when determining whether or not home equity is a good option and how to go about leveraging the home equity include:

  • Whether or not your loved one is married, single, or widowed
  • The type of care he or she requires (in-home care, nursing home care, assisted living, etc.)
  • Family dynamics and living situation (whether or not an adult child, spouse, or other caregiver plans to continue living in the home)
  • The geographic location of the home and whether or not it is easily rentable or sellable

These and other factors can help guide you in determining if the value in your loved one’s home can be used to help fund his or her care, and how to go about accessing that equity.

It is important to keep in mind that if your loved one is currently receiving or plans to apply for Medicaid payments, any changes in income or assets could impact his or her eligibility. While the value of Medicaid recipients’ homes are not usually counted toward their net assets for Medicaid qualification purposes as long as they are living in the home, any income that is generated through a reverse mortgage or other home equity loan may. Additionally, if he or she rents out or sells his or her home, that rental income or proceeds from the sale may also impact his or her eligibility on the basis of income or net assets.

Types of care

As previously discussed, “long-term care” covers a wide range of options, and the type of care your loved one needs depends on a variety of factors including his or her age and level of mobility, the availability of family members or other caretakers to assist him or her, and his or her own wishes and preferences.

The type of care your loved one requires will help you determine whether or not home equity may be a good financing option for your family. Once you know what type of care is needed, you will be able to gain a better understanding of how best to use home equity to pay for care based on associated costs and the particular needs of your loved one.

For example, if your loved one plans to remain in his or her home for the foreseeable future but requires additional funds to cover the costs of in-home care, a reverse mortgage may be a good option. Selling the home outright may be ideal for those who require higher-cost custodial care such as Alzheimer's disease memory care, or nursing home care or who plan to move into a facility that has high entrance fees such as a Continuing Care Retirement Community. More on this later.

Types of long-term care services that may be fully or partially paid for using home equity include:

As previously discussed, it is important to determine what type/level of care your loved one requires—and the costs associated—prior to taking out a home equity loan or reverse mortgage or making the decision to sell the home.

Ways to use home equity for care

There are four main options for using home equity to pay for long-term care and it is important to consider the pros and cons of each one as well as the unique needs of your family and loved one when determining which one is right for you.

Reverse mortgage

Reverse mortgages—sometimes referred to as home equity conversion mortgages (HECMs)—allow seniors to access a significant portion of their home equity without having to sell their home or move out.

The primary advantage of a reverse mortgage is that it does not require your loved one to make monthly payments. Instead, the balance of the loan becomes due when the borrower passes away, moves out, or sells his or her home.

Seniors with adjustable-rate mortgages have the option to collect their reverse mortgage payments as a lump sum, as a fixed monthly payment, as a line of credit to be used as needed over time, or some combination of these, while those with fixed-rate mortgages must receive their loan as a lump sum.

HECM reverse mortgage loans are federally insured by the Federal Housing Administration (FHA) and there are no restrictions dictating how the money is used. However, in order to qualify for a reverse mortgage, homeowners must 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 and be able to continue to make timely payments on life insurance, property taxes, and homeowners’ association (HOA) fees.

In addition, the Department of Housing and Urban Development (HUD) requires borrowers to participate in a consumer information session covering alternative options presented by a HUD-approved HECM counselor such as the American Association of Retired Persons (AARP).

Reverse mortgages can be a good option for seniors looking to use their home equity to pay for long-term care. However, due to the requirement that HECM borrowers continue to live in their home, reverse mortgages only make sense for seniors who will be receiving in-home care, adult day care, or some other form of long-term care that allows them to continue living in their home.

If your loved one requires residential long-term care such as assisted living or nursing home care, and his or her spouse is no longer living or is already in residential long-term care, you may want to consider other options, such as a traditional, fixed-rate home equity loan, a home equity line of credit (HELOC), or selling or renting the home.

It is also important to note that reverse mortgages have higher fees associated with them than other forms of home equity loans, and because reverse mortgages become due when the borrower passes away or moves out (and the proceeds from the sale of the home are usually used to pay off the loan) children or other loved ones do not generally inherit the home.

Home equity loans

Traditional home equity loans and home equity lines of credit (HELOCs) are often referred to as “second mortgages” because they operate similarly to a traditional (first) mortgage.

Home equity loans allow you to borrow a fixed amount of money (secured by your home), which you then repay in equal monthly payments over a fixed period of time (called a term). Interest rates on home equity loans, which are also fixed, are usually relatively low because your home operates as collateral. In cases where the borrower fails to make payments, the lender can foreclose the home.

The amount of the loan (how much you can borrow) is dependent upon a number of factors, including:

  • The equity in your home; in most cases, the loan cannot exceed 85 percent of the amount you have paid toward your mortgage
  • The market value of your home
  • Your income and credit history

The terms of home equity loans are usually shorter than those of traditional (first) mortgages. Home equity loans are typically 5 to 15 years, where traditional mortgages are typically 30 years.

Home equity lines of credit (HELOCs) operate much like a credit card. HELOCs allow you to borrow as needed over the life of the loan. You can borrow as much or as little as you need, whenever you need it, as long as you do not exceed your credit limit. Like a credit card, you only make payments on the money you actually borrow, not on the full amount available.

Like fixed-rate home equity loans, the amount you can borrow with a HELOC depends on a number of factors but typically cannot exceed 85 percent of your home equity. Your credit history, as well as any outstanding debt, will also play a role in determining how much you can borrow.

It is important to keep in mind that HELOCs typically have variable interest rates and, like a traditional home equity loan, your home operates as collateral.

One benefit of home equity loans and home equity lines of credit (HELOCs) is that, unlike a reverse mortgage, there is no requirement that the borrower continues living in the home. If your loved one requires residential long-term care but does not wish to sell his or her home, a traditional home equity loan or HELOC may be a good option.

Cash-out refinance

A cash-out refinance (or "cash-out refi" for short) replaces your current home mortgage with a new mortgage for a higher amount, and pays you the difference in cash as a “lump sum” (single payment). You repay the cash loan as part of the monthly payments on your new mortgage. The maximum amount of cash you can receive depends on your home value and remaining mortgage payments, as well as other factors.

The money received from a cash-out refi is not restricted to any particular purpose. It is most often used to pay down high-interest debt, fund home improvements or pay for large expenses such as long-term care.

A cash-out refi may be a good idea if you require a lump sum of money and can find favorable terms (including a low-interest rate) for the new mortgage.

Since you repay the loan as part of your new mortgage, the interest payments are tax-deductible. Since you will be paying off the loan for what may be many years, a cash-out refi is best used for a large expense with substantial upfront costs, which will provide benefits into the future.

Cash-out refinance risks

The biggest risk of a cash-out refi is that if you cannot make your new, larger mortgage payments, you may be forced to sell your home. Depending on the amount of the loan, your monthly payments could be substantially higher than your current mortgage. You should be certain that you can make all payments according to terms of the life of the loan.

Keep in mind that when you opt for a cash-out refi, you create a new mortgage that replaces your current one. The new mortgage will have different terms from the original, so be sure to pay as much attention to the new terms as you did with your original mortgage.

If you think you may apply for Medicaid or other income-and-asset-based assistance in the future, keep in mind that the cash-out refi payment may affect your qualification.

Will I still own my home?

Yes. However, if you cannot keep up with your payments according to the loan terms, you may be forced to sell your home. That said, if you cannot meet the terms of the cash-out refi agreement (i.e., if you cannot keep up with the payments), you could be forced to sell your home to repay the loan.

Cash-out refinance comparison

When comparing loan options, you should always factor in the total interest charges, upfront fees, maintenance fees, closing costs, and the risks of not paying the loan according to terms.

Compared to a personal loan or credit card, a cash-out refi offers more money and lower interest rates, but puts your home at risk if you can’t make your payments.

Compared with a home equity loan or line of credit (such as a HELOC), a cash-out refi offers a lower interest rate but comes with higher costs, including closing costs. A cash-out refi replaces your current mortgage with a new one, whereas a home equity loan or line of credit is a new loan in addition to your existing mortgage.

Compared with a reverse mortgage (such as an HECM), a cash-out refi enables you to retain all your equity in the home but requires you to make monthly payments.

Renting out your home

Another option for seniors who need residential long-term care but do not wish to sell their home (perhaps he or she anticipates children or grandchildren living in the home one day) is to help finance the cost of long-term care by renting out the home.

Depending on the home, this can produce substantial monthly income, particularly if he or she owns the home outright and does not have monthly mortgage payments.

Renting out a home requires time and attention, and—in most cases—your loved one will need to hire a professional property manager or have a trusted friend or family member manage the property. However, under the right circumstances, with the right property manager, and sufficient income generated from the rental, this can be a good way to finance the costs of long-term care without your loved one having to sell his or her home, make monthly payments on a loan, or reduce his or her home equity through a reverse mortgage.

One thing to keep in mind is that if your loved one is eligible for Medicaid payments based on his or her current level of income and assets, any income generated through renting out his or her home may affect his or her eligibility to continue receiving payments. It is important to understand your state’s Medicaid financial eligibility requirements prior to making the decision to rent out a home to finance long-term care. Learn more about your state’s Medicaid program and the financial eligibility requirements here.

Selling your home outright

In some cases, if your loved one requires long-term residential senior care and does not anticipate returning to his or her home, selling the home may be the best option to access the home equity. As previously discussed, the U.S. Department of Health and Human Services (HHS) estimates that the average person turning 65 today will incur $138,000 in future long-term care costs. Depending on the home and whether or not he or she owns it outright, the proceeds from selling a home can, in some cases, pay for the entirety of your loved one’s long-term care needs.

Selling your loved one’s home in order to help finance his or her long-term care is a big decision. The process of selling a loved one’s home can be emotionally difficult and requires a great deal of time, attention, and effort. There are some important considerations to keep in mind prior to making this decision, including:

  • Whether or not your loved one may ever wish to, or may be able to, return home and receive in-home care
  • Whether or not a spouse, child, or other family member or loved one may ever wish to live in the home
  • The potential that the home may increase in value over time
  • The cost of any renovations or repairs as well as other costs associated with selling the home
  • The potential stress or grief your loved one may experience as a result of selling his or her home
  • What to do with the contents of the home (furniture, possessions, etc.)

As previously discussed, in most cases, home equity can be excluded from your loved one’s assets when Medicaid eligibility is assessed. However, once those assets have been liquidated through the sale of the home, it is likely that your loved one may no longer qualify for Medicaid benefits, even if he or she did prior to selling the home.

It is important to remember that, even if your loved one does not qualify for Medicaid payments following the sale of his or her home, once the proceeds of the home sale have been paid down (as long-term care costs are incurred), he or she may qualify in the future. As is the case when your loved one decides to rent out his or her home to help pay for long-term care, it is important to understand your state’s specific financial eligibility requirements and how Medicaid payments may be impacted by the sale of his or her home.

Other options

Home equity loans, reverse mortgages, or selling or renting out a home can be good options for many people who require additional financial assistance paying for long-term senior care. That said, leveraging your loved one’s home equity to pay for long-term care is a big decision, particularly if he or she has lived in the same home for a long time, if a living spouse, child, or another family member currently lives, or plans to live, in the home at some point.

In addition, some or all of these options may simply be unavailable or unrealistic for some due to other factors. If your loved one does not own his or her home, or his or her family or living situation and care plan are not compatible with using home equity to pay for long-term care, there are a variety of other options available. Many people use a combination of resources to help cover the costs of long-term care. A few of the most commonly-used options are listed below:

Medicaid

It is very common for seniors to use Medicaid to help cover the costs of long-term care. Medicaid is a federally funded program; however, each state is separately responsible for overseeing and administering Medicaid benefits.

Medicaid is designed to address the needs of low-income individuals, and most states require beneficiaries to qualify for coverage by meeting both financial and functional eligibility requirements. Some seniors do not initially qualify but may qualify over time, once the costs of long-term care have reduced their assets and savings. Learn about the Medicaid benefits and requirements in your state here.

Medicare

Medicare does not cover the costs of long-term care for those who require assistance with activities of daily living (ADLs), either in their homes or at an assisted living or nursing home facility. However, Medicare can often be used to cover the costs of medical care that those who need long-term care may also require, such as hospitalization or skilled nursing care. Almost all adults over the age of 64 qualify for Medicare. Learn about Medicare eligibility requirements here.

Long-term care insurance

Most traditional health insurance policies do not cover the costs of long-term care, such as nursing homes and assisted living facilities. If they do, the insurance policy generally covers only very specific, medically-necessary services such as short-term skilled nursing or hospitalization. Long-term care insurance premiums are designed to cover the long-term care needs of seniors who require personal care and assistance with activities of daily living (ADLs) such as bathing, eating, dressing, and toileting, either in the individual’s home or in a senior living community, nursing home, or other long-term care facility. Learn more about long-term care insurance options and requirements here.

Veterans assistance

If your loved one served in the armed forces, he or she may qualify for Veterans Administration (VA) pension benefits, which typically cover some of the costs of long-term care for wartime veterans. There are minimum service requirements and financial requirements that a veteran must meet in order to qualify. Additionally, veterans must be at least 65 years old or permanently disabled in order to receive the benefit.

If a veteran is eligible to receive a VA pension, another benefit that can often be added to monthly pension payments in order to pay for the costs of long-term care is the Aid and Attendance (A&A) benefit. In order to be eligible for A&A, the veteran must require assistance with his or her activities of daily living (ADLs), live in a nursing home, or be disabled or bedridden. It is worth noting that surviving spouses of veterans sometimes also qualify for VA benefits.

Home equity and senior care FAQs

1. How old does my loved one need to be in order to use home equity to pay for long-term care?

It depends. Not everyone who needs long-term care and owns a home will qualify for every type of home equity financing option; however, certain forms of home equity may be leveraged by anyone regardless of age. Certainly, people of any age may sell their home or rent it out and use the proceeds to paying for long-term care such as a nursing home or assisted living facility.

Additionally, although there are certain financial requirements an individual must meet in order to qualify for a traditional home equity loan, there are no specific age requirements. These options are available to people of all ages.

Those who wish to use the most common type of reverse mortgage—a home equity conversion mortgage (HECM)—to cover the costs of long-term care must be at least 62 years old to qualify.

2. Will my loved one still qualify for Medicaid if he or she sells or rents out his or her home?

Although Medicaid is a federally funded program, each state is individually responsible for overseeing and administering Medicaid benefits. Therefore, whether or not your loved one qualifies for Medicaid coverage depends on the financial and functional eligibility requirements of his or her state of residency.

Medicaid is intended to provide coverage to low-income individuals. Typically, all assets are counted as resources when Medicaid eligibility is determined, including any real estate you may own; however, if you are currently living in the home, or the home is occupied by your spouse, a minor child, or another family member who is disabled, your home will likely not be counted as an asset.

In most states, if a person sells his or her home and the proceeds exceed the financial eligibility limits on assets or income, he or she will no longer qualify for Medicaid. In this case, an individual must spend down the proceeds of a home sale until they qualify, and re-apply for Medicaid coverage. Additionally, if your loved one chooses to rent out his or her home, the money he or she is paid by renters will be included in his or her income. If this raises income over the limit for Medicaid eligibility, your loved one will no longer qualify. It is important to understand the specific Medicaid policy in your state and understand all eligibility requirements before selling or renting out your loved one’s home.

3. What if my loved one requires residential long-term care, but his or her spouse is able to continue living in the home?

When one spouse requires a higher level of care in the form of assisted living, memory care, nursing home care, or some other type of residential long-term care and the other is relatively independent or is able to remain in the home and receive in-home care, a reverse mortgage is generally the best option.

Assuming both spouses are over 61 years of age, it is important that your loved one lists their spouse as a co-borrower when he or she applies for the reverse mortgage. A spouse who is listed as a co-borrower may continue to live in his or her home even when his or her spouse has moved into a long-term care facility or has passed away, and can continue to receive reverse mortgage payments, which can be used to cover the costs of long-term care for his or her spouse.