People are living longer these days, which increases the likelihood of eventually needing long-term care. One solution to mitigate the risks of not being able to afford long-term care at home is to use a “standby” line of credit from an FHA-insured* home equity conversion mortgage. Also known as a reverse mortgage, an HECM can serve as an alternative to long-term care insurance.
Don’t be left out in the cold when it comes time for long-term care. Learn whether your circumstances are such that a reverse mortgage could help you.
What Is an HECM?
An HECM loan allows homeowners who are nearing retirement age — and are at least 62 years old — to convert some of the equity in their homes into funds. You can use the funds any way you see fit, as long as you continue to live in and own your home.
Unlike a traditional home equity line of credit, an HECM has a flexible repayment feature: You can pay as much or as little as you want each month toward principal and interest or defer repayment until you sell your home or no longer live in it. If you opt for an HECM, you must continue to pay your property tax and homeowners insurance — and maintain your home — for the loan to remain in good standing.
How Does an HECM Work?
Using an HECM as a standby strategy can be easy to understand. Here’s a scenario that demonstrates how it works:
You have no immediate long-term care needs looming and you own a home worth $300,000. You take out an HECM at age 62 and choose a $151,060 line of credit to draw on only if or when you have in-home care expenses. When you have an HECM, the unused portion of your line of credit grows1 — independent of your home’s value — and provides more available funds as time goes on. Big bonus: You’ll accrue interest only on the funds you use.
Find Out: Are There Any Safe Reverse Mortgages?
You have a serious health problem at age 82 and you require in-home care. At a credit line growth rate of 5.831 percent — 6.385% APR plus a 1.25 percent annual mortgage insurance premium rate — your untouched credit line would have grown from $151,060 at age 62 to $531,858 at age 822, giving you a lot more funds to pay for in-home care expenses. Note: Like some mortgage rates, this loan has a variable rate, which can change annually.
Long-Term Care Insurance vs. HECM
LTCI can help pay for long-term care costs that health insurance, Medicare or Medicaid doesn’t typically cover. It can work best if you purchase it when you’re younger — ideally in your mid-50s — because premiums increase with age and it can be tougher to qualify and pay for LTCI when you’re over 60.
If you’re priced out of LTCI or denied for health reasons, an HECM line of credit might be an attractive alternative. It can have significantly lower out-of-pocket costs than LTCI, and a lender cannot base any credit decisions on your health.
*This material has not been reviewed, approved or issued by HUD, FHA or any government agency. The company is not affiliated with or at the direction of HUD/FHA or any other government agency.
1If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.
2The information being shown is for illustrative purposes only. Scenario is a 62-year-old couple, with a home valued at $300,000 and no mortgage, securing a reverse mortgage line of credit (LOC). LOC will grow at 0.12 percent above the 1-Year LIBOR (margin = 2.86 percent + initial rate = 1.72 percent + ongoing mortgage insurance premium of 1.25 percent = 7.03 percent). The initial LOC is $151,060; left unused, in 10 years, when they are 72 years old, LOC will have grown to $283,448 in available funds. In 20 years, at age 82, assuming no draws, the amount available will be $531,858. The estimates shown are based on a California property and Reverse Mortgage Funding LLC’s HECM annual adjustable-rate mortgage as of 06/05/2017. The initial annual percentage rate is 5.831 percent. The loan has a variable rate, which can change annually. The rate is tied to the 1-Year LIBOR plus a margin of 2.86 percent. There is a 2 percent annual interest cap and a 5 percent lifetime interest cap over the initial interest rate. This means that the maximum rate that could be imposed is 9.581 percent. This example assumes that the rate remains flat at 5.831 percent. There is a $0/month servicing fee. In this example, closing costs include an origination fee of $1,700, third-party closing costs of $2,939, and an upfront FHA mortgage insurance premium of $1,500, depending on the appraised value of the property securing the loan. The borrower receives a credit at closing of $0. Interest rates and funds available might change daily without notice. Closing costs vary by property state. In this scenario, the total cost to the borrower is $6,139.
Disclaimer: The author is not licensed to originate or solicit mortgage loans. 2017 Reverse Mortgage Funding LLC, 1455 Broad Street, 2nd Floor, Bloomfield, NJ, 07003, 1-888-494-0882. Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org, http://www.nmlsconsumeraccess.org). Arizona Mortgage Banker License #0927682; licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; loans made or arranged pursuant to a California Finance Lenders Law; Georgia Mortgage Lender Licensee #36793; Illinois Residential Mortgage Licensee; Massachusetts Mortgage Lender License #ML1019941; licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender; Texas Mortgage Banker Registration in-state branch address 6044 Gateway East, Suite 236, El Paso, TX, 79905. Not intended for Hawaii and New York consumers. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. L820-Exp022018.