Selling a house to pay for assisted living is a common option for homeowners in need of cash. Read on to learn more!
Are you or your family members considering a shift from independent to assisted living? Most of us will likely consider this situation, as nearly 70% of Americans aged 65 or older will utilize some type of assisted living facility or nursing home arrangement.1
For homeowners, selling their house to pay for assisted senior living is a frequent solution, as converting the property to cash to fund necessary care. Across the nation, the median cost for long-term care in an assisted living facility is upwards of $4,300 per month, while nursing home care fees are upwards of $7,700 per month. However, location, individual needs, and type of residential care and facility are all factors that influence those assisted living costs.2
There are multiple ways to sell or convert home equity to help foot assisted living bills—let’s take a look at some of the options and concerns.
Getting Authority to Sell Your Parent’s Home
Before sorting through solutions, ensure you have the legal right to complete a property sale or transfer. If you’re the homeowner, you’re good to go—but if you’re helping a parent, relative, or friend move forward with assisted living or senior care needs, here’s what you need to know.
If at all possible, plan ahead to save considerable time, money, and worry. You can represent the homeowner legally based on either:
- Power of attorney – POA is a legal designation set up with the participation of the homeowner. It primarily consists of a senior of sound mind signing witnessed, notarized documentation that allows a trusted party to make legal decisions and contracts on their behalf.
- Guardianship – If an individual is experiencing dementia or other conditions that mean they cannot sign away their legal rights, they are deemed incompetent and unable to execute POA. To represent them legally, you’ll need to petition a court to seek guardianship by proving mental unfitness—a lengthier, costlier, and more extensive process.
Consult with an elder law specialist to learn more about different types of these legal representations and how to accomplish them in your state. For example, there may be a forced division between making medical care decisions (such as a medical POA) and financial and legal decisions to avoid conflict of interest.
How to Use Home Equity to Pay for Assisted Living
For long-time homeowners, equity is the night garden that blooms when you’re not staring at it. Over the years, property grows in value organically so long as it’s maintained and repaired as needed. At the same time, you’re paying down the mortgage and shifting equity from the lender to you.
There are multiple ways to turn a property into profit, but the first step is to evaluate its worth to know the current value and the amount of equity you own.
Although the down-to-the-penny value of a home is only revealed when its sale is finalized, you need a market value to estimate your equity worth and start making plans. However, remember that different sources will provide you with valuations of varying accuracies, from a good guess to a legal estimate:
- Free online valuation calculators are a good start
- Current market value based on comparative market analysis from a real estate agent
- Certified professional appraisal to identify legal value prior to sale or lender financing
Once a home’s value is determined, subtract the amount still owed to find your equity. For instance, if your home is worth $350,000 and $100,000 remains on your mortgage, then your current home equity is $250,000 or about 71% of your home value.
With these figures, you can consider the best option for converting it to cash or income generation:
Selling A House to Pay for Assisted Living
A traditional home sale is usually the first option evaluated. Once you sell your home, you can use the profit as financial assistance to invest in a lifetime payout annuity, split between a downsized new home and in-home assistance, or directly pay an assisted living facility or nursing home.
Although a sale is the only way to unlock your home’s full value, listing your home for a traditional sale does have some drawbacks:
- Preparing your home for viewings: sorting, decorating, deep cleaning
- The cost and work involved in property upgrades and repairs
- Paying closing costs
- Real estate agent commissions
Taxes on capital gains can be another wrench in the mix if your home sale yields more than $250,000 in profit for a single homeowner or $500,000 for a married couple.
Home Equity Loans and HELOC
Home equity financing options include traditional home equity loans (or second mortgages) and home equity lines of credit (HELOC). Both of these debt instruments:
- Usually allow you to borrow up to 85% of your home equity
- Have higher interest rates than primary mortgage loans
- Use the property as a debt security, which means a foreclosure or lien is possible
- Require the borrower to have:
- Verifiable income
- A credit score in the mid-600s or higher, at least 720 for the best rates3
- A debt-to-income ratio between 36 – 43% (or less), including the new loan
The primary differences between these two debt instruments are:
- Borrowing level and method – A home equity loan is for a set amount that you borrow in full and then repay. A HELOC is a line of credit you’re approved for; you’ll have a window of time to access those funds and then a date to start repayment of however much (0% to 100%) of the credit you choose to take out.
- Interest rate – You’ll pay a higher interest rate for a HELOC than a home equity loan (but rates for both are rising in connection with inflation).4 Another difference is the typical rate types are fixed for a HE loan but variable for a HELOC.
A reverse mortgage is a property transaction available only to seniors; you must be 62 years or older to initiate one. The intention of this mortgage model is to:
- Keep seniors in their homes without the risk of foreclosure
- Allow seniors to access home equity without moving
It’s important to know the pros and cons of reverse mortgages for retirement. A reverse mortgage is similar to a home equity loan or line of credit, except that repayment is not triggered until the borrower passes away or leaves or sells the house. Depending on the type of reverse mortgage, a borrower can receive tax-free funds in the form of a:
- Lump sum
- Fixed monthly payment
- Combination of both
You can apply to any lender that offers this type of loan. Keep in mind, a reverse mortgage:
- Usually allows you to unlock 40 – 60% of your home’s property value
- Is a debt that impacts your credit record and limit
- Includes the expense of up-front origination and closing costs
- Requires mortgage insurance with monthly premiums
- Keeps the cost of property taxes and homeowners insurance with you
Some people confuse a sale-leaseback with a reverse mortgage because they have two main things in common: you sell your home, and then you keep living in it. But they’re actually quite different approaches.
Comparing a sale-leaseback vs reverse mortgage, a sale-leaseback:
- Converts your full equity to cash instead of just a portion of its value
- Has no age requirement; it’s an option for any homeowner
- Is debt-free; you’re not borrowing money or leaving debt for heirs
- Does not rely on a strict credit score, income, or debt ratio
When it comes to how to sell your house while living in it, steps include:
- Sell your home at fair market value
- Pay off any remaining mortgage and use the rest of the sale proceeds as you like
- Stop paying the cost and doing the work of home maintenance and repairs
- Pay a fair market, monthly rental rate
- Stay as long as you choose, whether that’s a few months or lifelong
Rent Out Your Home
The demand for rental properties—including single-family homes—is high in many areas. If your property is a good candidate for a rental, you may be able to convert it to an income generator after leaving it.
Also, consider a mix-and-match scenario. For instance, if your home is fully paid off and well-maintained, you could:
- Take out a home equity loan to unlock a cash pool immediately, and
- Keep the property as a rental unit for ongoing income.
How Long Does It Take to Sell a Home to Move into Assisted Living?
Depending on your level of preparation and what avenue you pursue, you could close on a house sale and access funds in a matter of weeks or months.
Total timing depends on whether your plan includes:
- Prep, cleaning, and repairs for a traditional sale
- Sorting, storing, selling, gifting, or donating valuable or sentimental personal property
- Setting up a power of attorney
- Petitioning the court for guardianship
- Working with elder law, tax, and financial planning professionals
- Navigating the impact of a sale, transfer, or debt on Medicaid
- The impact of local housing inventory and time on the market for a traditional sale
Sell Your Parent’s House to Pay for Assisted Living With a Sale-Leaseback
Want to build an assisted senior living fund for your parents without moving them right away?
Sale-leasebacks allows property owners to convert their equity without leaving the home immediately after a sale. These solutions bypass the mortgage and loan process’ roadblocks, particularly for those historically underserved by traditional lenders.
Plus, the homeowner will have the flexibility to stay in their current home for a period of months, years, or however long is needed.
There are several ways to use home equity to fund the costs of assisted living. From selling the house completely, to getting a reverse mortgage, or using a sale-leaseback program, you have options for building the funds that are needed. Contact a financial advisor to learn more about your options.
- LongTermCare.gov. How Much Care Will You Need? https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
- Dolinski Group. How To Sell A Parent’s Home To Pay For Assisted Living. https://dolinskigroup.com/selling-home/how-to-sell-a-parents-home-to-pay-for-assisted-living
- Nerdwallet. Requirements for a Home Equity Loan and HELOC. https://www.nerdwallet.com/article/mortgages/what-are-the-requirements-for-a-home-equity-loan-and-heloc
- NextAdvisor. Rising Inflation Keeps Pushing Home Equity and HELOC Rates Up. https://time.com/nextadvisor/loans/home-equity/average-heloc-home-equity-loan-rates-july-14-2022/