home equity

Should I get a HELOC or reverse mortgage line of credit?

Don TaylorDear Senior Living Adviser,
If you have a home equity line of credit, or HELOC, for $150,000 with no balance on it, should you use it instead of a reverse mortgage? Which is a better way to save the assets if there is a possibility of going to a nursing home?
-- John Juxtaposition

Senior man holding his glasses © iStock

Dear John,
The advantage of a reverse mortgage is that you've tapped the equity in your home without creating a stream of monthly mortgage payments. It's more expensive than a home equity loan, in large part because of its high closing costs. In contrast, the closing costs on a HELOC are usually in the hundreds instead of thousands.

With a reverse mortgage, you can choose a payment option that is just like a home equity line of credit, perhaps even better. The draw period on a HELOC typically ends after 10 years, but the draw period on the reverse mortgage can last until either the line is exhausted or the reverse mortgage comes due. If you delay borrowing against your reverse mortgage, the credit line increases with time.

If you're thinking about shopping for a mortgage, check your credit score first at myBankrate.

A line of credit trumps a mortgage -- be it a reverse or conventional mortgage -- when there's no lump sum sitting in investments that the state can see and require you to use for care prior to you qualifying for Medicaid payments.

How the states treat these lump-sum amounts from a mortgage, in terms of qualifying for Medicaid, may differ. If you were thinking of taking out a lump sum, you would want to know your state's rules.

If you plan on qualifying for Medicaid to pay for long-term care in a nursing home while protecting as much of your assets as you legally can, you need to work with a qualified elder law attorney in your state of residence to discuss Medicaid planning. Medicaid planning can differ for single people versus married couples.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Senior Living," "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

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