Should retirees tap home equity to pay off medical bills?
Health care costs can be a budget-buster for retirees, even those who have carefully saved for years. The average 65-year-old this year will spend $172,500 on health care and medical expenses, according to the reliability estimate.
That sum is nearly double the amount needed two decades ago, and is only likely to grow. In addition, it does not include long-term care services such as growing health facilities such as nursing homes, which 40% of the elderly will need one day, according to the US Department of Health and Human Services.
While the majority of Americans 65 and older are insured through Medicare, the public health system does not cover everything (such as long-term care), leaving many older adults with significant health-related gaps. In addition, even seniors covered by Medicare must pay premiums, deductibles and other costs.
On the bright side, after the eighties, baby boomers, who are between the ages of 61 and 79 years old, are sitting on the majority of the wealth – about half of the nation’s wealth, according to the Federal Reserve. The average price of equity for homeowners over 65 will drop nearly 50% between 2019 and 2022, and now, now, now, now, according to a survey of consumer finance.
All that real estate wealth gives retirees another asset to consider when dealing with rising medical expenses. Here’s what you need to know about using home equity to pay for health care in retirement.
The Benefits and Advantages of Using Home Equity for Health Care Expenses
Only 15% of homeowners 60 and older said they would consider using their home equity to meet financial needs in retirement, according to a Fannie Mae survey.
But some research shows that hitting this source can be beneficial for your finances and your health. For example, a 2022 study found older people with home equity loans were less likely to skip taking medications because they couldn’t afford them. In the next study, the researchers found that every $10,000 the owner of the house removed from their assessment after being diagnosed with a serious medical condition showed a significant improvement in their illness.
It’s not even rocket science that people who use their wealth are better able to manage the costs of chronic diseases, said Stephanie Moulton, a professor at Ohio State University who led both studies. But the findings are important because they show that older homeowners must be willing — and able — to find their designated housing asset.
“Two older adults may have the same amount of home equity, but the one who can access it with a mortgage may end up with better health outcomes than the one who doesn’t,” she said.
One of the biggest downsides of planning to use your home equity to cover medical expenses in retirement is that you may have trouble getting into it. Many older homeowners who would like to unlock the value stored in their homes are not eligible for home equity because their incomes are too low, the agency said.
Another challenge is making sure your home retains its known value. The average home rate has risen steadily over the past several years, but that trend is reversing in some areas, with some regions and cities facing cooling housing markets. A low assessed value, especially if you still have a loan, can make it harder to qualify for a loan.
Perhaps most importantly, many ways to achieve home equity involve using your neighborhood as a community. If you struggle to keep up with your loan obligations, you risk losing your home.
Ways to Tap Your Home Equity in Retirement
There are two main ways to unlock home equity in retirement: You can sell the home or you can borrow against it.
While you’re selling your home and renting or buying cheap property may not be your first choice, selling gives you access to quick cash, says Anqu Chen, director of household finance at Boston College’s retirement savings center.
In terms of borrowing against your home, you can take out a home equity loan or a home equity line (heloc). The second option is a favorite of financial planners, because it gives you the flexibility to borrow your equity for a grace period of only five to 10 years until the grace period is over, giving you more flexibility to borrow money. In both cases, you will need to make sure that you can afford the required monthly payments. And with a traditional heloc, you need to be prepared for your payment to increase – perhaps significantly – after the drawing period ends and you start paying back principal and interest. Alternatively, you can look for a lender that offers a heloc with a fixed, predictable payment term so it’s easier to plan what you’ll owe down the line.
If you don’t want to sell your home and are worried about the commitment of a traditional mortgage payment term, a refinance loan may make more sense. Neil KrishnaSwamy, a certified financial planner in McKinney, Texas, says a refinance can be a “powerful tool” for older adults who plan to stay in their home for a long time.
“You have a lot of control over where you pay,” he said. That’s because the loan repayment doesn’t come until you move out of your home (unless you fail to meet the terms of the loan, such as compliance with property taxes, insurance and home repairs). You can choose to get a payday loan, regular installment payments or a line of credit to tap as needed.
But a refinance loan generally requires that you have enough equity in your home. While there is no hard and fast rule, most lenders that offer a home conversion loan (HECM) – the most common type of reverse mortgage – require 50% equity. By comparison, you may only need 15% to 20% equity to get a home equity loan or heloc.
Ultimately, there is no one-size-fits-all recommendation for the best way to tap into your home equity of medical expenses. The best option for using your home equity will depend on your circumstances. “It really depends on what people want and how much money and liquidity they think they’ll need for retirement,” Chen said.
His biggest piece of advice? Educate yourself. Retirees often underestimate their future health care needs and how much that care will cost, she said. Knowing more about your risks and the resources available to pay for the medical care you may need can help you make better decisions.
“That can help clarify your options ahead of time, so you’re not surprised by retirement,” he said.
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