Introduction: Medicaid’s Home Equity Interest Limit
For a single senior’s primary home to be exempt from the asset limit when applying for long-term care Medicaid, there are specific home exemption rules that must be met. Relevant to the discussion of lowering one’s home equity value, is the home equity interest limit.
Home equity is the amount that one’s home would sell for on the current market minus any outstanding debt against the home, such as a mortgage. For instance, say the current market value of one’s home is $230,000 and they have an outstanding mortgage of $100,000. Their home equity is $130,000 ($230,000 – $100,000 = $130,000). If they own the home by themself, their home equity interest is $130,000. However, if they share the ownership with another person in equal amounts, each person owns 50% of the home, and the Medicaid applicant’s home equity interest is $65,000 ($130,000 ÷ 2 = $65,000).
In 2025, the home equity interest limit, although state-specific, is generally $730,000 or $1,097,000. Being over the home equity interest limit almost definitely will push one over their state’s asset limit, which in the majority of states is only $2,000. Then what? This will likely result in denial of Medicaid eligibility or the loss of Medicaid benefits for current beneficiaries. How does one lower their home equity interest to meet the asset limit, and hence, qualify for long-term care Medicaid?
Fortunately, there are Medicaid planning strategies, such as taking out a Reverse Mortgage or getting a Home Equity Loan, that can help persons lower their home equity. However, whether they are feasible strategies are dependent on one’s specific circumstances and state-specific rules.
Exceptions to the Home Equity Interest Limit
There are exceptions to the home equity interest limit for unmarried seniors. If they have a child under 21 years old or a child of any age who is permanently disabled or blind living in their home, it is automatically exempt from Medicaid’s asset limit regardless of their home equity value and where they live. Additionally, to be very clear, the home is also automatically exempt if a senior is married and their spouse is living in the home. However, should the spouse living in the home pass away or move, the home would no longer be exempt unless additional precautions are taken.
The home equity interest limit does not apply to persons applying for Regular Medicaid. It applies only to persons who are applying for long-term care Medicaid, such as Nursing Home Medicaid and Home and Community Based Services via a Medicaid Waiver.
Ways to Reduce Home Equity Interest
If one’s home is over their state’s Medicaid home equity interest limit, or if their home is near the limit, there are ways in which one can lower their home’s equity value.
Take Out a Reverse Mortgage Loan
A Reverse Mortgage, also called a Home Equity Conversion Mortgage (HECM) allows a homeowner (62+ years old) to convert some of their primary home’s home equity into cash, thereby, lowering their home equity value. Different from a traditional mortgage in which the homeowner makes mortgage payments to the lender (increasing their home equity), a homeowner instead receives cash payments from the lender (decreasing their home equity). Essentially, the loan is secured by the homeowner’s home.
To get a HECM, the homeowner must have no federal debt and must receive counseling from a Reverse Mortgage counselor from the U.S. Department of Housing and Urban Development (HUD). Home Equity Conversion Mortgages are insured by the Federal Housing Administration (FHA), which is part of HUD. The homeowner must also live in their home, and as long as they are living there, they do not have to repay the loan. It must be repaid, however, when the homeowner moves out of their home for more than 12 consecutive months due to a medical reason (i.e., nursing home admission), or for more than 6 consecutive months for a non-medical reason, sells their home, or dies. Often, it is via the sale of one’s home that the lender is repaid.
With a HECM, cash payments can be received monthly, in a lump-sum, or as a line of credit. Since a Reverse Mortgage is a loan, these payments are generally not considered income, nor are they taxed. Furthermore, most states do not count Reverse Mortgage payments as countable assets the same month of receipt. However, any remaining funds the month after receipt will be considered a countable asset. In other words, any remaining funds will count towards Medicaid’s asset limit. And to lower one’s home equity to below a state-specific home equity interest limit, one may need to take a large, or rather large, lump sum. Therefore, one may need to “spend down” the excess assets to meet Medicaid’s asset limit. One cannot gift any of this money, as it would violate Medicaid’s Look-Back Period and they will be penalized with a Penalty Period of ineligibility. Note: One should be cautious if getting a line of credit, as the entire line of credit could potentially be considered a countable asset the month in which it becomes available. This is true in Kentucky.
While taking out a Reverse Mortgage is a way for a Medicaid applicant / beneficiary to lower one’s home equity interest, it is not always a good idea. As mentioned above, the homeowner must live in the home, and Medicaid’s home equity interest limit only applies to single Medicaid applicants / beneficiaries. Therefore, this is not a feasible way for a single individual to lower their home equity to receive Medicaid-funded nursing home care. It might, however, be a way for a single elderly applicant to lower their home equity to receive Home and Community Based Services in their home via a Medicaid Waiver. The danger of this, however, is that they may require Nursing Home Medicaid in the future and then it would be required that the loan be repaid.
Get a Home Equity Loan
A Home Equity Loan, sometimes called a second mortgage, is a loan against a home that often still has an existing mortgage. A homeowner (of any age) can borrow a lump-sum payment (at a fixed interest rate) from a lender, although generally they must have at least 15% – 20% in home equity. Taking the loan turns a portion of one’s home equity into cash, thereby increasing the debt against one’s home, and simultaneously, lowering their home equity value. Unlike with a Reverse Mortgage, the homeowner must immediately begin paying pay the loan back in equal monthly payments for a set period of time.
Medicaid does not count a Home Equity Loan as income. Furthermore, the cash is not generally counted as an asset the month it is received. However, any remaining funds the following month are usually considered a “countable” asset and can impact if one is over Medicaid’s asset limit. Therefore, it is always best to “spend down” the money in the month it is received in a way in which Medicaid permits. As an example, for a senior who lives at home and receives Home and Community Based Services via a Medicaid Waiver, a Home Equity Loan could be used to make home modifications for safety and accessibility, pay off existing debt, or purchase an Irrevocable Funeral Trust.
Unfortunately, Home Equity Loans generally aren’t a good option for Medicaid-funded nursing home beneficiaries. Nearly all of one’s income, with the exception of a small Personal Needs Allowance of $30-$200 / month must go to the nursing home towards care costs. Given this, they will not likely have the funds to pay back a home equity loan. Someone else, such as a relative, would need to repay the loan, and if payments are not made, one would very likely lose their home.
Request an Undue Hardship Waiver
While requesting an Undue Hardship Waiver is not a way to lower one’s home equity, it is an avenue through which a state might waive the home equity interest limit. This allows one to be eligible for long-term care Medicaid despite their home equity being above the limit in their state. To be very clear, this avenue is not available in all states. Some examples of states that do allow it are Arkansas, Illinois, Louisiana, New York, North Carolina, Ohio, Tennessee, and Wisconsin.
In states that permit Undue Hardship Waivers for having substantial home equity, it is possible for a Medicaid applicant / beneficiary to apply for an Undue Hardship Waiver, given denial or termination of Medicaid long-term care (due to “excess” equity value) would cause them “undue hardship”. Generally, this means it would deprive them of one of the following: 1) Medical care – endangering their health or life 2) Food 3) Clothing 4) Shelter 5) Other life necessities (i.e., essential utilities). The exact rules for requesting an Undue Hardship Waiver are state-specific. For instance, in Louisiana, an applicant / beneficiary must document that they tried to reduce their home equity value in order to get it under the limit.
All Medicaid agencies should send out a notice informing a Medicaid applicant / beneficiary of their right to request an Undue Hardship Waiver, given it is an option in their state. Generally, there is a form that one needs to fill out and return within a specified amount of time. Additionally, the “burden of proof” is on the Medicaid applicant / beneficiary, which means they must provide documentation that proves they will have “undue hardship” without long-term care Medicaid benefits. While acceptable “proof” likely varies based on the state, if one is a current nursing home resident, they could provide a copy of the nursing home notice indicating their involuntary discharge date and the location in which they will be relocated upon leaving the facility.
Get Professional Help with a Certified Medicaid Planner
Prior to implementing any Medicaid planning strategy to lower one’s home equity value, it is highly suggested one discuss their specific situation with a Professional Medicaid Planner. These planners are extremely knowledgeable when it comes to state-specific rules and what is and what is not permitted in a specific situation. Whether they assist with lowering one’s home equity value interest or applying for an Undue Hardship Waiver, their assistance can be the difference between being Medicaid eligible and being ineligible. Find a Certified Medicaid Planner.