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Private Funds: Lines of Credit
Utilizing a Line of Credit to Pay for Senior Care Costs

If the need to pay for assisted living arrived unexpectedly, check out this clever way to help you or a loved one increase the budget and pay for a preferred lifestyle in senior housing. It's accomplished without compromising quality of care. When stuck in the middle of guessing how and if your current financial resources will be enough to pay for assisted living, seek a line of credit. This option is best when needing a bridge for capital until arrangements are in place for permanent financial help. There are lines of credit specifically for assisted living and senior care loans.

A Line of Credit is a resource for retirees before the home sells, or while waiting for the Veteran Aid & Attendance benefit to arrive, and even before Long-term care insurance kicks in. It's a clever option to get you to where you want to be - now.

Getting older and vulnerable is a difficult enough time, both emotionally and mentally. Add the rising costs of senior care and senior housing - now the situation springs to overwhelm. For the countless families caught in the lull between paying out-of-pocket and, at the other end of the spectrum, having a low enough income and assets to qualify for Medicaid, finding affordable assisted living seems like the impossible dream. But don't lose heart - there are plenty of strategies such as a line of credit that can help you fit quality senior care and housing into your budget.

What is a Line of Credit?

A line of credit is a source of funds extended to an individual by a bank or another financial institution.

Borrowers tap the funds at their discretion. Interest accumulates on money withdrawn. Before signing a line of credit, it requires the borrower to pay an unused line fee, which is an annualized percentage on the money not withdrawn. Lines of credit require collateral, or they become unsecured.

If you have a bank account, you may have a line of credit in the form of overdraft protection. It comes in other arrangements like home equity, a term loan, personal line of credit, revolving credit cards, and demand loans. Lines of credit secured by property; a house, a car, an annuity, a CD, or a savings account. It's the collateral that the bank or lender seizes if the individual fails to pay back the loan. The line of credit may require the signature of an adult child to co-sign with mom or dad.

Many assisted living and senior living communities offer this option. They offer incentives and some pay all of the interest on the line of credit, so be sure to ask the community you're interested in.

Know the Basics of Line of Credit

Qualifying for a Line of Credit

You must have available equity in a form of collateral like your home. Using the home as an example, the amount you owe is less than the value of the home. Lenders allow you to borrow up to 85% of the value of your home minus the amount you owe. Lenders look at your credit score and history, employment history, monthly income, and monthly debts, just like they did when you first got the mortgage.

Index

The index is a financial indicator used by banks to set rates on consumer loan products.

Margin

Margin is the amount added to the index to determine the interest rate for your home equity line of credit.

Limit

Limit is the amount of the allowable line. The lender calculates the line of credit limit.

Here's an example:

The lender allows a maximum credit limit of up to 85% of the home's value and the home appraise for $300,000, if you owe $150,000 on the current mortgage, you'll qualify for a credit line amount of up to $105,000. ($300,000 x 85% = $255,000 - $150,000 = $105,000).

Draw Period

The draw period is the time you can pay for expenses with the line of credit. It's anywhere from 1-10 years. You'll receive line checks or a card to pay for expenses. When paying for assisted living expenses, you'll receive a monthly bill with a required minimum payment. You must make payments on time; reducing the debt.

Interest

Interest accumulates on the money borrowed against the line of credit. Because lines of credit have variable interest rates, it varies from month to month and it is tax-deductible.

Always talk to a tax advisor about deducting the interest.

Types of Line of Credit

Home Equity Line of Credit

A home equity line of credit is a loan giving a maximum amount (in lump sum) within an agreed period. The collateral is the borrower's equity in the home. It's used for major items, like medical bills.

A conventional home equity loan uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. (Not given in lump sum but drawn against the line of credit monthly.) This is a bridge loan until Long-term care insurance, Life Insurance, or Veteran Aid and Attendance kicks in.

Signature Line of Credit

A signature line of credit is revolving and not backed by collateral. It's based on the individual's credit rating.

Benefits of an Assisted Living Line of Credit

Below are some benefits from utilizing a line of credit to cover senior care costs:

  • Use only what you need as you need it
  • Smaller monthly payments on funds used while you wait for that house to sell at a good price
  • Typically same day decision with fast funding (24 to 48 hours)
  • Usually unsecured, no collateral required for amounts up to $50,000
  • Up to six persons can join the application so one sibling doesn't have to carry the entire burden
  • Funds sent directly to the community each month to ensure it pays for assisted living
  • Flexible repayment terms of three to five years, more than enough time to sell a home
  • Line of Credit documents make it clear this is for mom or dad's housing and care.

Understand the Costs and Rates of a Line of Credit

Lines of credit have higher interest rates compared to home equities, primarily because they're unsecured. The interest rate is lower than credit cards. There is usually a one-time origination and support fee added to the principal. Ask the amount of fee. Consult with your financial and tax advisor first.

Carol Marak
Carol Marak

After seven years of helping her aging parents, Carol Marak has become a dedicated senior care writer. Since 2007, she has been doing the research to find answers to common concerns: housing, aging and health, staying safe and independent, and planning long-term.