Is Reverse Mortgage a good option to fund LTC?

Paying for a long-term care event can financially destroy a family. In a time where the housing market is good and retirement savings are bad, considering something such as a reverse mortgage can seem like a viable option. However, after digging a little deeper, one might rethink that decision.

What is a reverse mortgage?

A reverse mortgage is a loan option available to homeowners 62 and older, that utilizes the equity in their home in exchange for regular payments. The homeowners can use the payments for monthly expenses, including long-term care costs, but must remain living in the house. They are required to undergo pre-loan counseling and a financial assessment, as well as remaining current on property taxes, homeowner’s insurance, and any HOA dues. Residents must also maintain their property and pay back the loan when the home is sold or vacated.

Reverse Mortgages have a failure rate of 18%, that's six times the amount of a standard home loan.
Reverse Mortgages have a failure rate of 18%, that’s six times the amount of a standard home loan.

Why reverse mortgage is a bad idea

This all sounds like a pretty good deal, get paid back the money you invested in your own home. However, according to a HUD report in 2016, more than 18 percent of reverse mortgage loans taken out from 2009 to 2016 were going into default. Senior citizens were falling behind on taxes and insurance and were going to lose their homes. A standard federally insured loan in the traditional market has a 3% failure rate. That’s six times the failure rate of a traditional loan. Money-management expert Dave Ramsey thinks this program is a terrible idea due to high interest rates, low payouts, and a high failure rate.

Alternatives to a reverse mortgage

So what are some options for cash-strapped homeowners in need of long-term care insurance services? First of all re-evaluate your budget, cut unnecessary expenses and cut back on items where you notice excess. Downsize to a smaller home with smaller utilities, less taxes, and less general upkeep. Or investigate refinancing, taking out a home-equity loan, or taking out a home equity line of credit.

One of the best ways to avoid financial devastation and bad lending options in your later years is to purchase long-term care insurance in your fifties when you are getting ready to retire. This insurance gives you the option to stay in your home and be able to pay for the services you require. Just because you know someone who took out a reverse mortgage, or you hear about it in the news, does not mean it’s a good idea. Speak to a specialist today, and find out if long-term care insurance is the right option for you and your loved ones.