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Using a reverse mortgage to pay for long-term care costs is a strategy that is becoming more common in the world today. This strategy carries with it several advantages and disadvantages for you to consider. Here are the basics of using a reverse mortgage for long-term care and whether or not it is a good idea for you.
How It Works
The idea behind this process is simple and effective. If an individual is over the age of 62, they can potentially qualify for a reverse mortgage. They will also need to have a home that is paid off or has a very low mortgage balance tied to it. If the individual meets these qualifications, they can start working with a reverse mortgage lender. The reverse mortgage lender will then start making regular monthly payments to the individual. These payments will be purchasing a portion of the equity in the home. When the equity in the home is exhausted, the payments will stop. At that point, the individual can continue living in the home for as long as they want. They will not have to make any repayment to the lender until they sell the house or pass away.
The biggest advantage of using this method is that it creates a source of regular income for the individual. If you are trying to find a way to pay for long-term care costs, this is going to be one of the best options that you have. Many retirees have retirement plans or pensions that provide them with a monthly payment. They will also be able to receive something from Social Security. However, in many cases, these two sources of income are not enough to make ends meet. When you have the high cost of long-term care, this is often too much for people to bear. By using the reverse mortgage, you will be able to create another source of income that can help subsidize the cost of long-term care.
Outliving the Loan
Although this program can create a source of money for a long period of time, it will eventually run out. If the individual outlives the equity in their home, the payments are going to stop. Even though they do not have to start making payments back to the lender, they will no longer be receiving regular income. If they are counting on this payment to pay for long-term care, they could be in serious financial trouble. They will no longer be able to pay for the care that they need.
Using up Inheritance
Another problem with this method is that it will use up a good portion of the inheritance that you can leave to your heirs. You are essentially selling the equity in your house to the lender. Whenever the house is sold or you die, you will have to pay the equity back to the lender before your beneficiaries can receive anything.
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