Using Home Equity to Finance Long-Term Care

A majority of elderly Americans have the bulk of their assets tied up in the houses they own. Reverse mortgages could tap this home equity, providing loan disbursements without requiring older homeowners to make monthly payments on principal and interest. In this paper we analyze the potential of using home equity to finance long-term care of the elderly, including payments for home care and for long-term care insurance. We first estimate each homeowner's risk of need for care (and risk of institutionalization) and then calculate the degree to which home equity could be used to cover the costs of home care (or of insurance premiums). Special emphasis is placed on those in the highest risk group and on those with the lowest incomes, who often turn out to be the same people.