Rose, a recently widowed, 69-year-old retired teacher, had a bad fall getting out of the shower. Her knees suddenly felt weak, and she hit the porcelain tile floor, knocking her head on the toilet seat on her way down. Fortunately, Rose doesn’t suffer from osteoporosis, and she got to the hospital quickly after the accident. Unfortunately, she broke her hip and a wrist, as well as suffering a mild concussion.
Her primary care physician expects her to make a full recovery, but he’s concerned that, as she lives alone, she’ll be on her own at home while she recuperates. After a first fall, chances of an older adult suffering a second fall double. And without help around the home during recovery, the likelihood of more severe injuries from another fall is high.
Rose needs support for approximately six months of recovery and funds to make some aging-in-place improvements around the home — like grab bars and better lighting in the bathroom — to keep her safe during recovery and help prevent falls thereafter.
Although she has Medicare, it will only cover two weeks of full-time home care once she leaves the hospital. Sam, her adult son, is flying in from New York to stay with Rose for another week. That still leaves Rose without the support she needs for 21 weeks, plus funds for home improvements.
What are Rose’s options for paying for the care and home upgrades that she needs?
How much will home care cost?
Rose needs non-medical home care to help with daily activities, as well as run errands since she can’t drive until she’s fully recovered. She’ll need full-time help for another week after her insurance and family help run out, and then she’ll need at-home help every day for at least five hours. In Oregon, where she lives, that kind of in-home care averages between $33 - $34 an hour. One week of care for eight hours a day is between $1,848 and $1,904. Five hours of care a day, seven days a week for another 20 weeks, comes to somewhere between $24,255 - $24,990. Her in-home care total will be approximately $26,375.
Once she’s out of bed, Rose will need a walker ($75) while she’s recovering and a dog walker for her Shih Tzu, Zucchini ($200/week). She’ll also need some cash for delivery fees for groceries and for taxis or rideshares ($50/week). For 21 weeks of services, those miscellaneous costs add up to $5,325.
To help avoid a second fall and keep her safe as she ages, Rose would like to install three grab bars and non-slip rugs in her bathroom ($996), improve the lighting between her room and the bathroom and in the bathroom ($350), upgrade to an electric bed ($1,700), and add handrails along her front porch steps ($550). These safety improvements add up to $1,896.
Altogether, the home care, improvements not covered by insurance, and services will cost approximately $33,596, or about $6,108 a month.
How much of her income can Rose spend on home care?
Like many Americans her age, Rose is on a fixed income. Her monthly income is her teachers’ pension at $2,916, as well as her and her deceased husband’s Social Security payments, $4,150, for a total of $7,066.
She spends about $3,184 a month on food, transportation, home maintenance and insurance, and normal health care expenses. Rose also pays $1,000 a month on a car loan for Sam’s family, so her two grandchildren can ride in a safer vehicle, and she likes to visit the family in New York as often as she can. Including the loan and other discretionary expenses, her monthly costs range from about $4,184 to $5,500, leaving her $2,882 or less each month to put toward home care and improvements. If she spends all of that on in-home care, it will cover about $14,000 of the approximately $33,600 total, or less than half, that she needs.
Affording care with home equity
Fortunately, Rose can manage the minor home improvements on her own, but she will need an additional $19,600 to afford the care she needs. Because Rose owns the home that she and her husband bought during their marriage, she also has the equity in that house. When they bought it, the house cost about $100,000, and it’s now worth about $400,000. Rose owns the home; she no longer pays a mortgage. If she can access some of the equity in her home, it will more than cover the care she needs.
How can Rose access her home equity?
Rose’s biggest fear is that accessing her home equity will mean having to sell or leave her home. She wants to stay in her community as she ages, so she isn’t interested in options like sale-leaseback or home equity investment, which involve selling all or part of the house. Fortunately, because she’s recovering from an injury rather than looking at needing regular at-home care going forward, she doesn’t need as large a sum as one of those financial products is designed to provide.
Is a reverse mortgage right for Rose?
Rose’s neighbor Coco told her about reverse mortgages, which are another way of accessing home equity. Coco said her 79-year-old sister, who lives in Fort Lauderdale, got a reverse mortgage to pay for in-home care, allowing her to stay in her home of 40 years, rather than having to move into an assisted living community.
Rose had heard that reverse mortgages were bad products that took advantage of the elderly, but Coco insisted that her sister was financially comfortable and grateful to be staying in her home. Feeling a bit overwhelmed by the ins and outs and long-term financial consequences of major financial products, Rose got in touch with Wellahead and spoke to a concierge. The concierge explained that in a reverse mortgage, the proceeds of the loan can be paid to the borrower in any of several ways:
- Lump sum, the only option with a fixed interest rate
- Equal monthly payments (i.e., annuity or tenure plan) for as long as the borrower lives in the home. A line of credit may be added to this option in the original loan agreement.
- Term payments, which are equal monthly payments for a set period of the borrower’s choosing, such as 10 years. A line of credit may be added to this option as well.
- Line of credit, in which the borrower can access the money available as needed, paying interest only on the funds actually borrowed.
If a reverse mortgage made sense for Rose, the logical option would be the lump sum, which has the advantage of the fixed interest rate.
Reverse mortgages have some advantages. Borrowers do not make any loan payments until the loan becomes due—usually when they are no longer in the home (for a year or more) or the home is sold. However, because borrowers don’t make any payments, including interest payments, during the borrowing period, the amount Rose owed would increase over time, rather than decrease, the way it does with a regular, “forward” mortgage used to purchase a house.
The Wellahead concierge noted that the amount of the loan also increases over time because reverse mortgages have fees built into the loan, often pricier than those for other types of home loans, as well as some fees that continue throughout the life of the loan. All these fees also accrue interest during the borrowing period. These costs can be added to the loan, but that means less of a payout for the borrower.
Furthermore, the more Rose owes the lender, the less she owns of her house. Some reverse mortgage customers plan to repay the loan by selling the home—or having the home sold upon their death.
Reverse mortgages are more complicated financial products than HELOCs (home equity lines of credit), in that they have more rules about who can access one. Reverse mortgage customers must
- Be at least 62 and own a home that is in good shape
- Have at least 50% equity in their home based on a current appraisal (rather than the original cost of the home)
- Live in the home as the principal residence
- Keep up with property tax and home insurance payments, as well as any home maintenance and repair costs, during the life of the loan.
- Not owe any federal debt, including income taxes or student loans
- Receive counseling by a HUD-approved reverse mortgage counseling agency about eligibility, alternatives, and the financial implications of the reverse mortgage
Rose and Wellahead’s concierge agreed that a reverse mortgage was probably not the right product for Rose. It is ideal for someone in her neighbor’s sister’s situation, someone who needs long-term care, who can afford the upkeep on her home, and isn’t planning to leave the house to an heir.
Why doesn’t a reverse mortgage make sense for Rose?
She doesn’t need long-term care, she doesn’t need to access as much of her home equity as would make sense with a reverse mortgage, and it would be difficult for her to pay the reverse mortgage back. The possibility of not being able to leave the home to Sam, or worse yet, losing the house in a foreclosure while she was still alive, were too high risk for Rose.
For the full scoop on reverse mortgages, including whether or not they’re insured, and what sort of borrower they’re designed for, read our previous blog post What is a reverse mortgage and who should consider getting one?.
After talking over her situation with a Wellahead concierge—both her needs and her preferences—Rose determined her best option is a HELOC (home equity line of credit), through which she will borrow against the equity she’s accumulated in her home.
Is a HELOC right for Rose?
A home equity line of credit, or HELOC, is sort of like a credit card with a non-renewable expiration date. Like a credit card, you receive a line of credit, you pay interest on the amount you borrow, and the money can be used for anything.
However, for situations like Rose’s, a HELOC is better than a credit card because the interest rate is lower and, during the draw period (the period of time during which you can use any amount of the available credit) you only pay the interest on the amount you borrow, not the principal. When the draw period expires, usually five to 10 years, the loan enters a repayment period. How long you have to pay back the principal, or the amount of credit you used, depends on the agreement with the loan provider. It can be 10 to 20 years or you may be responsible for the whole principal as soon as repayment begins.
The amount of credit for which you’re eligible through a HELOC depends primarily on the equity you have in your home. This means how much of the home you own (versus how much you still owe, if anything), and what that portion of the home is worth at the time of the loan. Lenders require the following:
- a minimum of 15% home ownership
- a credit score of 600 or above
- a debt-to-income ratio of 40% or less. (Your debt-to-income ratio is how much you owe—on your home, car, credit card, etc.—versus how much you bring in via Social Security payments, retirement accounts, and so on.)
HELOCs are especially useful when the financial need is for an infusion of cash, like home improvements or temporary in-home care requires, rather than on-going care. This is because of the lower interest rates, low payments during the draw period, and the fact that you still own your home. Of course, if you default on a HELOC, just like defaulting on other types of loans, there are financial penalties.
It’s important to remember that once the repayment period begins, the payments are much higher, as you are paying back the principal, i.e., however much of the credit you actually used. And while HELOCs usually have much lower interest rates than personal loans or credit cards, their interest rates are variable and tied to the prime rate, meaning they can go up, sometimes significantly.
With a HELOC, you can usually access 75% - 80% of the home’s value, reduced by the existing mortgage, i.e., 75% - 80% of the equity you have in the home, not how much the property would sell for.
Why is a HELOC the best option for Rose?
The HELOC makes the most sense for Rose, as it gives her all the cash she needs when she needs it, and at a lower rate with fewer fees than a reverse mortgage. Although a HELOC’s interest rate is variable, meaning it can go up (and down), it is usually a lower rate than that on a personal loan or credit card.
Given her good credit history, low debt, and home ownership, Rose could qualify for a HELOC of $220,000 at a rate of 9%. Since she only needs about $33,600 over the course of five months or so, it would make sense for her to request a line of credit for a bit over what she knows she needs, just in case her recovery takes longer, or she decides to make more safety modifications for her home, say a total of $38,000.
Rose would have access to the whole $38,000 once the line of credit was approved. Her monthly payment would be the interest, at $285, until the principal (however much of the $38,000 she used) became due. The loan has a 20 year draw period and the repayment period can start as soon as Rose is ready to begin paying back the principal.
The HELOC is not a long-term financial commitment, but Rose would benefit over the long-term from the safety improvements to her home as she ages. If she pays off the HELOC according to the terms of her agreement, she would be eligible for another HELOC or a reverse mortgage down the road, if her health care needs changed.
There are a variety of circumstances in which older adults, particularly those on fixed incomes, may need extra cash to afford care they need. It might be for the aftermath of a fall or other injury, or it might be a long-term need resulting from permanently reduced mobility. Here, we’ve walked through the best options for a retiree recovering from serious injury to access the equity in her home in order to pay for in-home care. It’s important to note that every situation is unique. Folks in different circumstances–with more debt, for example—would likely have different options for best accessing their home equity.
Do you need guidance determining how to get money to finance temporary or long-term in-home health care? Let us help you navigate through your options. Contact us today by calling or texting 919-230-2599, or by emailing firstname.lastname@example.org.