At a time when more and more aging Americans need home health care but don’t have the pensions or savings to cover the costs, some experts say it could be wise to turn to a much-maligned source: the reverse mortgage.
That was a message behind a Monday webinar, co-sponsored by the National Reverse Mortgage Lenders Association (NRMLA), on using home equity to pay for home care.
The way NRMLA and some other financial-planning advocates see it, the solution boils down to a simple math problem: Home care costs a significant amount of money, seniors generally want to stay in their homes for the length of their retirement years, and a staggering portion of Americans’ accrued wealth rests in their home equity and not in liquid assets. Patty Wills, a reverse mortgage professional at Open Mortgage in Owings Mills, Maryland, said on the webinar that Americans aged 62 and up control about $6 trillion in home equity. However, this much-repeated figure is open to some interpretation; according recent research from the Urban Institute, a Washington, D.C.-based think tank, that figure is closer to $4.4 trillion, with only $3.6 trillion accessible after accounting for mortgage draw limits and other limiting factors.
“It is the largest asset for most people entering retirement,” Wills said. “We can’t ignore it. We can’t ignore it in retirement planning, and more specifically, in paying for in-home care. Very often, people are just sitting on their largest asset.”
Whatever the actual macro picture holds, the micro-level math could make sense for some older Americans. Marty Bell, executive director of the National Aging in Place Council and the senior vice president of NRMLA, gave the fictional example of a Long Island couple in their 80s, each with some moderate health problems and a need for home care. This fictional couple has $167,000 remaining in a 401(k), but could potentially face $35,000 a year in caregiving expenses. After jokingly suggesting that they could start driving for the Uber ride-sharing service, Bell said the answer lies in their $380,000 of home equity, as they own their split-level house free and clear with no mortgage payments.
Enter the reverse mortgage—or, more technically, the Home Equity Conversion Mortgage—which allows seniors to borrow money against their homes without making monthly payments. The loan becomes due only when the last surviving borrower—or spouse of a borrower—dies or leaves the home. The borrower or heirs can then typically pay off the balance through the sale of the home. Because the products are insured by the Federal Housing Administration (FHA), the amount due can never be higher than the sale price of the home. Should the home decline in value and sell for less than the loan balance, the FHA’s mortgage insurance picks up the difference.
First introduced by the Department of Housing and Urban Development (HUD) during the Reagan administration, the product earned a sordid reputation during its early years, one that was largely justified: As a recent CNBC story on reverse mortgages points out, the concept of “free money” tends to bring out the worst in people. The HECM’s image suffered amid reports of unscrupulous lenders who forced unwitting seniors into taking reverse mortgages and investing the proceeds in questionable financial products, and borrowers who spent all their money without fully understanding the consequences.
But in recent years, the HECM has seen a public-relations boost amid new consumer safeguards, such as mandatory counseling and a detailed financial assessment for all prospective borrowers, as well as laws preventing cross-selling in many jurisdictions. Academic research on how the products could benefit even higher-income retirees by providing a safety net during bearish markets is also helping the HECM’s image.
HECMs aren’t the only way to access home equity: Borrowers can also receive a traditional “forward” home equity loan or line of credit. But as Wills pointed out on the webinar, banks can freeze such loans if the value of the home declines or the borrower experiences financial difficulties, two scenarios that can’t occur with a HECM. Home equity loans also require regular payments. Under the HECM program, Wills noted, payments are optional, and many seniors don’t pay a dollar during their lifetimes.
Of course, Wills and Bell aren’t exactly unbiased sources. But at the start of the webinar, Doug Lueder, CEO of Prosper Home Care in Atlanta, noted that people tend not to think about home care costs until they’re faced with a significant emergency, such as a sudden illness or accident, and a variety of sources that older folks think might pay for extended home care—Medicare, private health insurance, or Veterans Affairs insurance—simply don’t.
“The bottom line is: Most people want to stay at home, most people want to age in place,” Lueder said.
Written by Alex Spanko