By Mark Schumacher, NMLS ID 519754; Mutual of Omaha Mortgage, Inc. NMLS ID 1025894
For one reason or another, most mature adults do not have a long-term care insurance policy, despite the growing likelihood that long-term care services will be needed at some point in our lives. One reason this funding option is not utilized more frequently is the cost of paying for the premiums. The longer the insured waits to obtain a policy, the higher the premium will be, given everything else is equal. Even if it is an affordable premium, it can still be a hard pill to swallow for something we hope we never need. Then there are folks with pre-existing conditions that disqualify them from getting a policy. Whatever the reason, it’s often difficult to have a financial solution for this possible need.
A more cash flow-friendly option to prepare for this expense is to have the house pay for this service if needed by leveraging it with a reverse mortgage line of credit (LOC). A reverse mortgage is a home loan that allows you access to some of your home equity with the advantage of not having to make monthly payments on the loan. That’s what makes it so helpful to cash flow.
This use of a reverse mortgage works best if the home is owned outright or has a very small amount of debt. It also helps if it is used strategically, years before the healthcare need arises. This is because once the line of credit is established, it continually expands so that each following month there is more money available to access than there was the month prior.
This chart shows that a homeowner age 62 (minimum qualifying age) with a home value of $400,000 would qualify for a $126,000 starting line of credit. It’s what happens next that is so significant. The LOC immediately starts increasing. This growth is such that it develops into a surprising amount of liquid cash for people to use to pay for things. This example assumes no draws are taken to show the growth potential. In the 16th year of the loan, for example, the homeowner would have secured access to as much money as the home appraised for at the outset of the loan—over $400,000. That can pay for a lot of care.
The starting home value is shown because it is relevant in determining how much the starting LOC is. The home value is not shown going forward because it is not relevant in determining how much the LOC grows. The loan balance (debt) in this example never gets over $1,000, so the green Loan Balance bar is just a sliver on top of the zero line next to the available LOC. Taking draws from the LOC means the draw amount is added to the loan balance for payback later.
In this example, the borrower brought $16,400 for closing costs, but that is optional. This mortgage matures once the borrowers no longer live in the home, typically due to death, sale of the home, or moving out.
Borrower obligations are to stay current on property taxes, homeowner’s insurance, HOA dues if applicable, and home maintenance. At death, the heirs have the option of paying off the loan balance to keep the home or selling it to get the equity out of it, like with other mortgages.
Typically, homeowners utilize this strategy when they are in the home they’d like to stay in long-term so they get the growth benefit on the LOC for as long as possible. Essentially, it’s a method to self-insure for this possible expense.
The calculations used in the above chart and example assume an expected interest rate of 6.875% and an estimated 8.830% APR. Since interest rates change regularly, the starting loan qualification amount changes regularly. Closing costs vary by state and can affect the line of credit amount. Loan charges include origination fee, mortgage insurance premiums, and settlement costs which are to be determined. Some of these fees may be financed into the loan. Interest rates for the line of credit are variable but for this example are assumed constant at 6.875%. Results of financial assessment can impact starting line of credit amount. Speak with your licensed loan officer for current loan calculations and clarifications.
