Planning for long-term care costs is one of the most difficult financial challenges many families face. Whether you need in-home caregivers or must move to an assisted living or skilled nursing facility, expenses can grow quickly, leaving older adults and their families searching for funding options. For homeowners, a frequently overlooked choice is a reverse mortgage, which unlocks home equity to help cover care costs without necessarily requiring a sale or a move.
This article is for informational purposes and is not personal financial, tax, or lending advice. Consult a qualified financial professional and tax advisor before making decisions about a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage allows a homeowner age 62 or older to borrow against home equity and receive cash without making monthly mortgage payments. Interest and fees are added to the loan balance over time. The borrower retains the title and the home remains theirs while they live in it.
A reverse mortgage becomes due when none of the age-eligible borrowers occupy the home as their principal residence—typically after the last borrower permanently moves out, sells the property, or passes away.
There are several reverse mortgage products, but the most common is the home equity conversion mortgage (HECM). HECMs are available only through FHA-approved lenders and are insured by the U.S. federal government, making them the most regulated and widely used type of reverse mortgage.
Who qualifies for a reverse mortgage?
Federal HECM rules require borrowers to be at least 62 years old. The home must be kept in good condition, and borrowers must continue to pay property taxes, homeowners insurance, and maintenance costs. Prospective borrowers must also complete counseling with a HUD-certified reverse mortgage counselor.
When the borrower permanently leaves the home, lenders typically allow up to 12 months to sell the home and repay the loan. For couples, that period normally starts when the second eligible borrower permanently moves out. This rule matters when using a reverse mortgage to cover long-term care facility costs. If you use the reverse mortgage to pay for in-home care while continuing to live in the home, the loan is not triggered.
Borrowers must use the home as their principal residence. That requirement can be useful for those moving proactively to a continuing care retirement community (CCRC). For example, you might use a reverse mortgage to pay a CCRC entrance fee while maintaining the home as your primary residence until it sells. Living in the home more than six months a year generally satisfies the occupancy requirement, though this arrangement may not always be the best economic choice. It can, however, reduce the risk that a health change during the home sale process disqualifies you from moving into a CCRC.
How do you receive money from a reverse mortgage, and how much?
The amount available from a reverse mortgage varies by borrower. Key factors include the age of the youngest borrower or eligible non-borrowing spouse, the loan’s interest rate, and the maximum claim amount, which is the lesser of the appraised value of the home, the sale price of the home being purchased, or the HUD insurance limit.
HECM proceeds can be taken as a lump sum, fixed monthly payments, a line of credit, or a combination. Each option has implications for long-term care planning:
- Lump sum: Provides immediate cash but may be counted as an asset for means-tested programs like Medicaid if not spent promptly.
- Monthly payments: Provide steady income to cover ongoing in-home care or facility costs.
- Line of credit: Offers flexibility for unpredictable needs; unused credit in many HECMs can grow over time.
Withdrawals from a reverse mortgage are generally tax-free. Before proceeding, understand loan fees (origination, counseling, closing costs), mortgage insurance for HECMs, and whether the interest rate is fixed or adjustable.
What can reverse mortgage funds be used for?
HECM funds are flexible and can be used for nearly any purpose. They are not restricted to home repairs or mortgage payoff. Common uses include:
- Paying for in-home caregivers such as home health aides
- Funding adult-day services
- Covering assisted living or memory care monthly fees
- Paying medical bills
- Funding home modifications (ramps, bathroom safety)
- Paying long-term care insurance premiums
Families often use reverse mortgage proceeds to help a loved one remain at home or to cover assisted living costs. Although lenders don’t typically restrict uses, it’s wise to carefully track spending for planning and benefits purposes.
An important note on Medicaid eligibility
Taking out a reverse mortgage can affect Medicaid eligibility, depending on how funds are received, how they are used, and specific state rules. Generally, reverse mortgage payments do not count as income for Medicaid, but funds that are not spent in the month received may count toward the next month’s asset limit. Because Medicaid rules are complex and vary by state, consult an experienced financial planner, elder law attorney, accountant, or lender before pursuing a reverse mortgage if Medicaid is a consideration.
Potential advantages of a reverse mortgage
- Provides quick access to funds for immediate or ongoing care expenses.
- HECMs are federally insured and include consumer protections other products may not.
- No required monthly mortgage payments, which can free Social Security and pension income for other needs.
- Lines of credit can grow over time when unused, offering a flexible reserve for future needs.
Potential risks of taking out a reverse mortgage
- Reduces home equity and may substantially reduce the inheritance left to heirs unless home appreciation offsets the loan balance.
- The loan can become due sooner than expected if you move out of the home for an extended period.
- You must continue to pay property taxes, homeowners insurance, and maintain the home to avoid default and foreclosure.
- Closing costs, mortgage insurance premiums, and origination fees reduce the net proceeds received.
Consumer protection agencies advise caution: watch for scams, misleading claims, and aggressive sales tactics, and seek loans only from reputable institutions.
Weighing a reverse mortgage to pay for long-term care
A reverse mortgage can be a useful tool to provide flexibility and financial breathing room to fund essential services, maintain independence, and ease family burden, but it is not right for everyone. Carefully compare payment options (lump sum, tenure, term, line of credit), understand loan terms and fees, and evaluate potential effects on Medicaid and other benefits.
Consult an elder law attorney, financial planner, and accountant to understand the financial, tax, and estate planning consequences before proceeding. For more detailed, official information, review resources from HUD, the Consumer Financial Protection Bureau, and federal consumer protection agencies or seek guidance from qualified professionals.