The cost for medical treatment continues to rise, especially during the decades of retirement.
A 65-year-old couple retiring in 2016 can expect to need approximately $260,000 to cover health care costs in their nonworking years, according to Fidelity, a financial services company.
If you currently live in your own home and are at least 62 years old, a reverse mortgage loan provides an option to cover ongoing expenses, including medical fees.
This type of mortgage loan allows you to convert some of the equity of your home into cash. The loan won’t need to be repaid during your lifetime as long as you comply with all of the terms.
While a reverse mortgage loan offers the appealing opportunity to age at home, “you’ve got to understand the fine print,” notes Jason Eichmiller, a branch manager at Open Mortgage, LLC in the Philadelphia area.
Before opting for one, you’ll want to make sure it’s a good fit for your health situation, your home and financial future.
You have several options for how you’ll receive the money from a reverse mortgage loan, including the following:
Lump sum: You’ll receive a single amount of cash.
Tenure: You’ll have fixed monthly payments while you live at home.
Term: Expect to receive fixed monthly payments for a set period.
Line of credit: You’ll be able to withdraw the amount of cash you need when you need it until you’ve reached the line of credit’s limit.
Combination: You’ll receive a combination of monthly payments and a line of credit.
To qualify for a reverse mortgage loan, you’ll need to meet certain requirements, including that you own the home completely or have a low mortgage balance. You’ll have to live in the home and pay property taxes and insurance.
The loan usually doesn’t have to be repaid until after you move out or die. Then, the home may be sold to repay the balance. If the place sells for more than the loan balance, you or your heirs will receive the difference. If it sells for less, the bank will take the loss.
Also, your children or heirs could arrange for the loan to be paid if they wish to keep the home.
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Medicaid, Supplemental Social Security effects
“While a reverse mortgage doesn’t affect Social Security or Medicare benefits, it can adversely impact Supplemental Social Security and Medicaid,” notes Eichmiller.
This is because Supplemental Social Security and Medicaid are designed to help individuals that meet specific requirements, including income levels.
For instance, if you take the proceeds for a reverse mortgage loan in a lump sum, that dollar amount would count against you for Medicaid, says Greg Cook, vice president of Reverse Lending Experts. This is because a lump-sum reverse mortgage loan creates a nest egg that would most likely have to be spent down to qualify for Medicaid assistance.
For those who want to improve their chances of qualifying for Medicaid, “the better solution is to take the line of credit option of a reverse mortgage,” Cook says. “It’s tax-free but doesn’t count as income because they’re borrowing against their equity.”
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Look at home modifications
Paying for medical expenses and maintaining a home can be difficult, even though most Americans want to do both. Eighty-three percent of retirees and those close to retirement want to stay in their home as they age, according to the Home Equity and Retirement Income Planning Survey released this year by The American College of Financial Services.
“Many people think that they’ll only be able to stay in their home temporarily,” Eichmiller says. But a reverse mortgage might allow them to modify their homes or get the care they need to stay in their homes indefinitely.
You might use the cash from the reverse mortgage loan to add safety features such as grab bars, low-pile carpeting to avoid tripping, or a stair lift chair.
Other modifications to lengthen the amount of time you can remain at home include putting in a shower and entryway that have no curbs or high steps, kitchen countertops at different levels so you can work at them while sitting or standing, wider doorways, better lighting and walk-in tubs.
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Know the risks of medical bills
One of the key advantages that a reverse mortgage loan brings is the opportunity to increase your current income. The cash you receive from the loan can be used however you feel fit, and if you have health conditions, the money could be put toward paying these expenses.
However, using the proceeds from a reverse mortgage loan for medical bills can create risks. If you face high, unexpected fees such as a trip to the emergency room or a long hospital stay, the costs may add up quickly and be hard to cover.
“Medical bills are personal, unsecured debt,” says David Reiss, professor of Law at Brooklyn Law School. “If you do not pay them, you may be sued and a judgment may be entered against you.”
To reduce your risk, consider ongoing health expenses, such as prescriptions or medications, before getting a reverse mortgage loan. Evaluate your income and plan a budget to cover the basics.
If you face unexpected charges, “you may be able to negotiate them down to a manageable level,” Reiss says.
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Think about the upcoming years
If it’s likely your health situation could require a move to an assisted living facility or nursing home in the next few years, you could be facing an expensive change.
“With any reverse mortgage, if you are out of the home for more than 12 months, the loan is due and payable,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
At that time, the home would be sold to pay off the loan, or your children or heirs could opt to settle it.
Furthermore, reverse mortgage loans come with various upfront costs, including origination fees, title insurance, a home appraisal and a home inspection. If you move soon after taking out a reverse mortgage loan, you’ll have paid these initial costs for a loan you didn’t use very long.
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Evaluate your inheritance goals
“A reverse mortgage is one of those tools that can be used in any estate planning,” says Heather McRae, a senior loan officer at Chicago Financial Services, Inc. “It’s one piece to consider within the larger plan.”
Before getting one to cover health costs, you’ll want to think about what will eventually happen to your home. “If you want to pass this asset on to your heirs, then a reverse mortgage is probably not a good option for you,” McRae says.
You’ll also be required to meet with a counselor to make sure you understand how the loan works. In addition, Fleming advises that you talk to your family and financial adviser.
“It’s really important to have somebody that has a decent understanding of financial matters,” Fleming says. That person can help you evaluate your income, health care options, and your future and that of your loved ones.