Reverse Mortgage Loan Blog

Older Americans who banked on selling their homes to finance care in assisted-living facilities and retirement communities have seen their dreams go up in smoke amid the housing-market bust. At the same time, their investment portfolios have nose-dived.

In these rough economic times, funding long-term care poses a challenge for seniors and their families. There are a range of strategies you can pursue.

Financial hit

For people without long-term care insurance, which is the majority, the financial hit can be hard if care is needed. The average cost of a private room at a nursing home runs $76,500 per person annually, while a one-year stay in a one-bedroom unit in an assisted-living facility costs $36,000, and periodic care from a home health assistant costs $18,000 or more per year.

Rent deferrals

While there are no easy answers, shopping around, switching the care setting, pooling family finances and looking at loan options can be conduits to affordable care.

Many independent-living and assisted-living facilities, in particular newer facilities or those that embarked on ambitious expansion plans when the economy was riding high, are offering specials to boost flagging occupancy rates.

“Many facilities are offering to defer rent until seniors can sell their homes or are offering lower introductory rates for the first six months” as sweeteners, said John Temple, chief operating officer at A Place for Mom, a national senior-housing referral service. The service is free to consumers. A Place for Mom is compensated by the facilities when a senior is placed.

Community fee waivers

Many facilities will waive the community fee, a deposit typically equivalent to one month’s rent, for those who ask. The best deals are often at smaller residential homes, which need to fill vacancies quickly and have more latitude to cut individual deals, Temple said.

Continuing-care retirement communities, which offer more health services as seniors age, typically require entrance fees of hundreds of thousands of dollars, plus monthly fees.

Cheryl Sherrard, a certified financial planner at Rinehart & Associates in Charlotte, N.C., says switching to a smaller apartment can be a money-saving strategy for older Americans who’ve set their hearts on moving into a specific retirement community.

“I’ve seen communities allow couples to move in with a percentage of the entry fee due initially but a delay on the remainder being due for a period of six months after move-in,” giving seniors wiggle room to complete the sale of a house, she said.

Nonprofit communities

“Retirement communities backed by nonprofit religious organizations can be a more-affordable option,” said Karen Schaeffer, president of Schaeffer Financial in Rockville, Md. Such communities welcome people of all beliefs.

Nonpremium rooms

Temple recommends asking independent and assisted-living facilities about nonpremium rooms, which can be real bargains but generally aren’t advertised. The rooms are farther from the dining room or have less desirable layouts, for example. Having a roommate might not be everyone’s cup of tea, but companion rates can shave $1,000 a month off rent for single seniors who are willing to share, Temple said.

Farther afield

Widening your geographic search by just a few miles can produce more budget-friendly options, says Karen Altfest, vice president of L.J. Altfest & Co., a fee-only financial-planning firm in Manhattan.

Relatives can pitch in toward the cost of care in a variety of ways. For instance, individuals can give as much as $12,000 per person per year without paying a federal gift tax. That exclusion amount will increase to $13,000 in 2009.

Intrafamily loan

Such loans can allow adult children to lend money to cash-strapped parents who need funds now to pay for care until they can sell their homes.

Reverse mortgages

Reverse mortgages enable homeowners age 62 or older who own their home outright or have a small mortgage balance to convert home equity into cash without selling the house.

The Home Equity Conversion Mortgage, insured by the Federal Housing Administration and backed by the Department of Housing and Urban Development, is the most popular kind. Lending institutions also offer proprietary products.

The amount you can borrow will depend on your age, your home’s value and current interest rates. For an HECM the limit is $417,000, but proprietary products may allow you to borrow more.

Payments can be taken as a lump sum, in regular installments, as needed or through a combination of these options. The accrued principal and interest comes due when the last borrower dies, sells the home or moves out permanently.

A big drawback of a reverse mortgage is the high fees, which are similar to a regular mortgage’s closing costs.

Sue Hunt, a housing counseling programs manager for Consumer Credit Counseling Service of Greater Atlanta, says reverse mortgages tend to make the most sense for people who want to spend the rest of their lives in their homes and whose total income, including the loan, will be sufficient to cover all their future expenses, she says.

With any type of loan, it’s important to understand the fees, interest rates and repayment terms.

For instance, an important safety feature of an HECM is that your payments from the lender are guaranteed by the federal government. Plus, if your home is sold for less than the loan’s value, neither you nor your heirs will be liable for the balance, which isn’t always the case with proprietary products.

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