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Using Home Equity Loans to Pay for Long Term Senior Care
| Definition |
Qualifications |
Costs |
| Pros & Cons |
Benefit Types & Limits |
How to Apply |
| Overview of Home Equity Lines of Credit | ||
A home equity line of credit or HELOC is a loan that is much like a credit card, except with lower interest rates. Borrowers are told the maximum amount they can borrow and then they can take any amount of money from the bank as they need. Monthly payments depend on how much is borrowed, but typically these are very low, often “interest only”.
A home is used to secure the loan. The loan can be and very often is in second position behind the primary mortgage. Unlike reverse mortgages, failure to repay the loan can result in foreclosure of the home.
The loan, or line of credit, is given for a set period of time from 5- 25 years, 10 years being very common. At the end of the loan period, a borrower pays back the loan in a lump sum (usually by selling the house).
Many seniors are in a situation where they do not have a lot of income or savings to pay for long term care but do have financial resources tied up in their home ownership. A Home Equity Line of Credit (HELOC) offers a way for seniors to quickly get cash from the value of their home to pay for long term care. It is important to note that they do not have the same consumer protections as reverse mortgages.
Reverse Mortgages are a common option for seniors to pay for long term care but there are situations where a HELOC is a better option.
- For short term loans of less than 5 years - HELOCs are simpler with lower costs and faster turnaround times. Reverse mortgages have higher closing costs. Costs with a HELOC are low upfront and accumulate over the life of the loan.
- As assurance against unforeseen emergencies - while reverse mortgages can be taken as a line of credit, HELOCs are significantly less expensive.
- If the future is uncertain and the senior has possible large life changes within a few years, HELOCs can offer greater flexibility than a reverse mortgage.
- With mixed age couples - to prevent a reverse mortgage from coming due when one spouse passes away, couples will include both partners as borrowers. This means that both borrowers must be older than 62. Married couples that have large age differences might be in a situation where one spouse is old enough and the other is not. A HELOC may provide a short term solution until the younger of the spouses reaches the age of 62.
- The amount of money a senior can borrow in a reverse mortgage is calculated on many factors including the age of the youngest borrower. For borrowers near the minimum age of 62 or for couples with large age differences, the amount that can be borrowed may be too low due to younger age of one spouse. HELOCs may provide additional borrowing power to the couple.
- For some tax reasons - With a HELOC, monthly interest payments are tax deductible in the year they are paid. With a reverse mortgage interest is not paid until the house is sold or the owner passes away. For some seniors, usually those with higher incomes, it may be better financially to have the loan’s interest payments deducted annually.
There are also situations where a HELOC is not a good option.
- Persons with very low income – HELOCs require one to make payments and sometimes that makes it difficult to qualify for the aged, non-working population. That said, it is possible, for a short period of time, to make the monthly payments by drawing against the HELOC (i.e. borrowing more to make loan payments), but for longer periods this will not work.
- Note that during the periods of rapidly declining home values, banks can and have frozen HELOC loans.
Various Scenarios – Reverse Mortgages vs. HELOC
Every senior’s situation is different and in some cases a HELOC is not the best option. Here we explore several situations and why different seniors might want or not want to use a HELOC instead of a reverse mortgage.
- Single Seniors in Fair Health
For these individuals, a HELOC is beneficial only if they need resources immediately and for just a few years. However, since the senior is in fair health, it is unlikely there is an immediate need. These individuals are probably better served with a reverse mortgage. - Single Seniors in Need of Care
There is no requirement that seniors remain living in the home as there is with reverse mortgages, therefore if a senior needs care that requires them to live outside their home, a HELOC may be a good option. This is especially true since HELOCs are more economical for short term borrowing. Often moving into senior housing comes as a sudden decision and requires a large upfront, move-in cost. HELOCs can cover these costs while the home is sold. - Married Seniors in Fair Health
Unless there are large age differences in the couple, married seniors in fair health are probably served better with a reverse mortgage. Being in fair health means they probably don’t require the resources immediately. Additionally, mixed age couples often cannot receive a high enough loan amount to make a reverse mortgage feasible or just don’t qualify since amounts are based on the age of the youngest borrower. - Married Seniors with One Spouse in Need of Care
In this situation both options are available to the couple. There is no clear advantage to one type of loan based on the health status alone. Decisions should be made based on the immediacy and the extent of the family’s need. - Married Seniors with Both Spouses in Need of Care
With both spouses in immediate or near-term need of care that requires them to live outside the home, the reverse mortgage option is very unlikely. A HELOC is the better short term option while the family sells the home and then pays for the care with those proceeds.
For some seniors, neither HELOCs nor reverse mortgages are good options. However, there are other loan options designed specifically for seniors requiring short term loans. Please visit the senior care loans page for more information.
Be Aware That:
-Failure to make HELOC payments can result in foreclosure.
-Lenders can freeze home equity lines of credit due to depreciating home values such as were seen in 2008. The terms of some loans do not even require the borrower to be notified if their loan has been frozen. Obviously, this can be a major problem for those using the loan to pay for senior housing.
-Lenders can freeze home equity lines of credit due to depreciating home values such as were seen in 2008. The terms of some loans do not even require the borrower to be notified if their loan has been frozen. Obviously, this can be a major problem for those using the loan to pay for senior housing.
Home Equity Lines of Credit are Also Known As:
-HELOC
-Home equity loans
-Home equity line
-Home equity loans
-Home equity line
Age Requirements
There are no minimum or maximum age requirements for a Home Equity Line of Credit.
Disabilities / Health Requirements
A senior’s disability or lack of disability does not play a role in qualifying for a home equity line of credit.
Family Status
A senior’s family or marital status is requested on the loan application but does not play a role in the senior’s eligibility.
Financial Status Requirements
Lenders will consider a senior’s income level to determine if they are able to make the monthly payments. This can be an obstacle for seniors on fixed or with limited income. However, lenders also realize that elderly individuals can borrow from the loan balance to make the payment and the loans can be structured as interest-only so the monthly payments are very low.
Lenders will also consider the senior’s equity in the home and the existence and amount of other mortgages. Note that having another mortgage does not automatically disqualify one for a home equity line of credit. Seniors seeking HELOCs should be largely unaffected by the credit crisis of 2008 because of the high equity positions most of them have in their homes.
Veteran Status Requirements
Veteran status does not play a role in HELOC eligibility.
Geographic Requirements
Home equity lines of credit are available in all 50 states.
Types of Benefit Payout
A HELOC is a line of credit, meaning the borrower can take as much of a loan as they want up to a certain limit. This means they can borrow as a lump sum, in monthly installments or on whatever schedule they’d like.
Restrictions on How Payout Can be Used
There are no restrictions on how the proceeds from a HELOC can be used.
Benefits Amounts & Limits
In additional to the credit history and income level of the borrower, the limits on a home equity line of credit depend on the amount due on the primary mortgage if one exists.
For example, for a home valued at $250,000 with $150,000 due on the primary mortgage, a borrower can borrow against the remaining $100,000. Before the 2008 credit crunch, one could borrow as much as 90% of that $100,000. That percentage has gone down considerably since then, one can expect around 50%. Note also that lenders reserve the right to change the limit without notice.
Time to Receive Benefits
Borrowers for home equity lines should expect a minimum of 4 weeks from application to receiving access to the funds.
This Source Can Help For
Any purpose the senior or their family chooses including:
-In-home care
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care
Home Equity Lines of Credit are often advertising as having no closing costs. This may or may not be accurate; sometimes closing costs are hidden in an “annual fee” and it is not always clear what is defined as “closing costs”. Certainly other fees and costs exist, some of which can be waived by request.
- Appraisal fees can range from $200 - $500.
- Annual fees, charged by some but not all lenders, can be as much as $100 / yr.
- An “early closure release fee” may be charged and can be considerable if one closes the account within the first 3 years. It is also known as “early closing cost reimbursement” and “prepayment penalties”.
- “No usage fee” might be applied if borrower never actually takes out money from the line of credit.
- Account maintenance / check-writing fees exists
To provide a ballpark number, for a $150,000 HELOC, costs may be around $1,000.
It is generally accepted that for short term loans, HELOC are more cost effective than reverse mortgages, especially for loans of between 3-5 years. This is largely due to the 2% insurance premium required for reverse mortgages.
Seniors with good credit should qualify for a HELOC interest rate that is near the prime rate. The balance on a HELOC can change daily as borrowers draw funds or make payments. Therefore lenders calculate interest daily.
One can apply for a home equity line of credit online or at almost any bank. Many people find it of value to complete a loan application with online with a loan consolidator as these applications rarely take more than 5 minutes to complete and require no commitment from the borrower.
The larger benefit is the loan consolidator will generate multiple loan offers that are easily compared. Even if one is not ready to take the loan, completing the application, helps the individual be better informed when they are ready to make the decision. Locate a home equity line of credit lender.
