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Using reverse mortgage funds to pay for long-term care

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Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, but don't have the savings to manage the cost of assisted living. One way to help pay for it is grabbing a reverse mortgage and using the equity in their mortgage-free home.

Here's how to evaluate whether a reverse mortgage might be a good option.

What is a reverse mortgage?

A reverse mortgage is a loan on the assessed value of a home. Homeowners must be at least 62 to apply.

If you have at least 50% to 55% equity in your home, you have a good chance of qualifying. How much you can access depends on your age and the home's appraised value. You must keep paying taxes and insurance on the home, and the loan is repaid when the borrower dies or moves out.

A reverse mortgage is a non-recourse loan, meaning if the loan amount ends up being more than the home's value, the borrower or inheritor won't have to pay more than the loan amount owed or what the home could be sold for.

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Can you use a reverse mortgage for long-term care?

A reverse mortgage can provide a new stream of income to pay for long-term care, but there are limitations.

One limitation: a reverse mortgage requires that you live in the home. If you're the sole borrower of a reverse mortgage and you have to move to a care facility for a year or longer, you'll be in violation of the loan requirements and must repay the loan.

Because of the costs, reverse mortgages are also best suited for a situation where you plan to stay in your home long-term. They don't make sense if your home isn't right for aging in place or if you plan to move in the next three to five years, said Marguerita Cheng, a certified financial planner in Maryland.

But for home health care or paying for a second borrower who's in a nursing home, a reverse mortgage can help bridge the gap. Using home equity through the reverse mortgage is a different option as opposed to pulling money from an individual investment account, said Dennis Nolte, a certified financial planner in Florida.

The advantages 

Your home is generally one of your biggest assets, and using its value to handle long-term care costs can make sense.

"Most people will find that their home is the only asset they own appreciating this year, and that makes it a good source to utilize for income needs," said Byrke Sestok, a New York certified financial planner.

Now might be a great time to apply for a reverse mortgage, financial planners said, because home values are high. An unused line of credit grows over time, so your balance will have increased by the time you need the money. Another advantage: all money you withdraw from your reverse mortgage line is tax-free, and it doesn't affect your Social Security or Medicare benefits.

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The disadvantages 

Reverse mortgages can solve a problem, but there are downsides to using the equity in your home.

First, you'll be leaving less to your heirs. Instead of passing on an already paid off home, you'll saddle them with a loan.

Another disadvantage is that they're expensive. If you're getting a reverse mortgage, expect to pay about 3% to 5% of the home's appraised value. You'll also be paying interest. The interest accrues on any portion you've used, so eventually you will owe more than you've borrowed.

This article was provided to The Associated Press by the personal finance website NerdWallet. Kate Ashford is a writer at NerdWallet.

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