Home equity can be a valuable financial resource for elderly individuals who need help paying for long-term-care expenses. Whether you need the money to help cover the cost of a nursing home stay or pay the expenses for home health care, before you tap into the equity in your home, it's important to consider the types of home equity loans available.
Conventional Home Equity Loan/Home Equity Line of Credit
While you must pay back the loan with interest, the total cost of a conventional home equity loan or line of credit can be less than that associated with a reverse mortgage, which generally comes at a higher interest rate and with more upfront costs. With a home equity loan, you also may be able to deduct the interest you pay on the loan on your federal income tax return.
As long as you can afford to make the monthly loan payments, a standard home equity loan is an option that allows you to access your home's equity to help meet medical or long-term-care expenses that insurance won't cover. But if you aren't certain how much money you will need to cover elder care expenses once your health and/or long-term-care insurance pays its portion, a home equity line of credit (HELOC) is another option to consider.
You will receive a line of credit that will allow you to withdraw the money you need for elder care services as the bills come in rather than borrowing a lump sum amount in advance. Unlike a standard home equity loan on which you pay interest on the full loan amount from the start, with a line of credit, you only pay interest on the outstanding loan balance.
Keep in mind, however, that although home equity loans, including HELOCs, allow you to borrow up to 80 percent of your home's equity, you must meet the income and credit requirements to qualify for a loan that large.
Home Equity Conversion Mortgage Loan
A home equity conversion mortgage (HECM) loan – a government-sponsored reverse mortgage loan program – offers several different payment options. This allows you to choose a payment method that will meet your financial needs. The payment options available include:
Tenure plan. With this option, you will receive equal monthly payments for as long as you are living, provided that the home remains your principal place of residence.
Modified tenure plan. This option allows you to withdraw from a line of credit or receive scheduled monthly payments. Like the tenure plan, you must remain living in the home as your primary residence.
Term plan. Although a term plan is similar to a tenure plan, the equal monthly payments you will receive are scheduled for a fixed number of months. You may select the length of the period in which you will receive payments.
Modified term plan. Similar to a modified tenure plan, a modified term plan allows you to withdraw from a line of credit or receive scheduled monthly payments over a fixed repayment period that you choose.
Line of credit. This payment option allows you to access money from the loan amount for which you are approved in the amounts you need when you need.
You must be 62 years old or older to apply for a HECM loan. In addition, your current mortgage must be paid off or the principal significantly paid down. Although there are fees, including a loan origination fee, annual mortgage insurance premiums, and other charges, associated with HECM loans, you can choose to have these costs taken out of the loan proceeds instead of paying them out-of-pocket. You do not repay the loan until you sell the home, no longer live in it as your primary residence, or die at which time the loan is repaid out of your estate.