[Last updated November 25, 2024]
As older adults and their families explore senior living options, financial considerations play a crucial role in the decision-making process. The cost of care can add up, and families may wonder how to afford it. Luckily, there are different types of loans available: Reverse mortgages, home equity loans and lines of credit, bridge loans, and personal loans can help secure funding for required care or living arrangements. Understanding the different types of loans will help you make the decision best suited to your needs. Here, we compare loan products commonly used to finance senior care.
Reverse mortgages
While technically a loan, it’s easier to explain the workings of a reverse mortgage in more practical terms — selling your home back to the bank one month at a time. Most adults aged 62 and older who own or have a significant amount of equity in their home can qualify for a home equity conversion mortgage through the Department of Housing and Urban Development.
This type of financing does not require monthly payments, which helps borrowers gain cash flow and a financial cushion moving forward. Instead, the debt becomes due when selling the home, when moving away and no longer using the property as a primary residence, or upon death.
Reverse mortgages are not taxable, which shields borrowers from experiencing a reduction in Social Security benefits due to the added income. While monthly payments from a reverse mortgage are the most typical structure, there are also options to take lump-sum payments or establish a line of credit that can be used when needed.
Home equity loans
It can be helpful to think of home equity loans as reverse mortgages that require monthly payments. The homeowner accesses cash by borrowing against the equity in their home, then makes interest-bearing payments back to the lender each month.
The barrier to entry on a home equity loan is generally lower than on a reverse mortgage. It allows borrowers of any age to apply — no need to be 62 or older as with a reverse mortgage — assuming they hold at least 20% to 25% equity in the home. Older adults need to consider the consequences of failing to make payments on the loans, though, which could ultimately result in the loss of the house.
Home equity lines of credit
A home equity line of credit, or HELOC, is a home equity loan that permits borrowers to exchange equity for cash incrementally on an as-needed basis rather than taking a lump sum that requires monthly payments. This option gives older adults peace of mind without committing to borrowing large sums of money as with a traditional home equity loan.
Bridge loans
Unlike reverse mortgages and home equity loans, bridge loans are meant to “bridge” the funding gap when moving to a new location — often a smaller residence or a senior care facility. The loan gives borrowers the capital needed to facilitate such moves and features short repayment terms. For example, when moving to an assisted living facility, a bridge loan can make the move possible while waiting for a more permanent funding source, such as the sale of a home or insurance benefits. Due to the short-term nature of the loan, fees and interest rates tend to be higher. On the plus side, disbursement of funds typically happens faster than it does with other options.
Personal loans for seniors
Personal loans carry the most risk compared to other options because they can be obtained without posting collateral, such as a home. Due to the unsecured nature of personal loans, credit scores will carry more weight on a bank’s decision to fund a personal loan, and older adults with less creditworthiness will face higher interest rates or even outright denial.
For seniors with substantial income, Social Security and retirement account disbursements provide an option to repay personal loans without risking assets such as a home.
Comparing loans for seniors
One of the most crucial aspects of taking on debt that older adults should consider is the effect of their financial decisions on heirs. While reverse mortgages offer the convenience of receiving monthly income without making payments, a borrower’s estate will ultimately be responsible for repaying the loan. This can add stress to an already stressful situation for descendants and make it more difficult for beneficiaries to keep homeownership without taking out a loan, depending on the estate’s assets. This style of loan may be more effective for older adults who do not expect any of their heirs to take ownership of the home after death.
Home equity loans help mitigate these effects as borrowers make monthly payments and reduce the debt load throughout the remainder of the loan’s terms. Personal loans provide an opportunity to receive needed cash without tying the debt to a physical asset. Older adults who expect an heir to take physical ownership of their home after death might consider this option to reduce potential complications.
Reverse mortgages boomed in popularity after the turn of the millennium but have begun to decrease in number in recent years. For those who take a lump-sum reverse mortgage, it’s important to remember that the homeowner must still cover property taxes and homeowners’ insurance, and nonpayment could lead to the loss of the home. If the money from the loan is depleted before the sale of the home, a property owner could find themselves in hot water, carrying a large amount of home-related debt without the ability to pay the other costs of owning the home. While these risks are very real, reverse mortgages remain the strongest option for older adults with minimal liquid assets but a large amount of home equity.
Bridge loans are an excellent option for older Americans looking to move. The ability for multiple borrowers to sign on the loan allows family members to help a loved one through a temporary hardship.
Regardless of the loan type being considered, older adults should always be on the lookout for those who employ predatory lending practices. Every person’s financial situation differs, and recommending specific loan types requires intimate knowledge of finances and family goals. Please consult a financial advisor for information specific to your needs.
