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The next fee is the entrance fee; it’s the large chunk of money, $100,000 to $1,000,000 or more, that is due at the signing of the final contract. The amount of the entrance fee is usually shocking when you first see it; no matter the amount of your net worth, However, you need to view it as an investment in your future and peace of mind. Knowing you have a life plan in place that will protect you as you age, and your health deteriorates can relieve stress for both you and your loved ones.

Entrance fee

An estimated 75% of CCRCs offer contracts that include an entrance fee as well as a monthly maintenance fee payment. If a resident leaves the CCRC, the resident loses all or a part of the entrance fee, depending on how long the resident has lived at the CCRC and any refund option in the contract. Understanding all the entrance fees and monthly fee options available for units at a CCRC can be confusing. It requires a lot of time to analyze and compare the different fees since they change depending on the unit, refund choice, and type of contract. There may be hundreds of thousands of dollars of differences between the various options offered for the same dwelling unit.

The amount of the entrance fee will be affected by the newness of the facility. Some studies have shown that the amount of the entrance fee can be twice as high for newer facilities. Other factors that affect the amount are the location of the CCRC, the size and amenities of a housing unit, and the type of contract. As a rule of thumb, entrance fees are usually set at or above medium house values in the area where the CCRC is located.

The entire entrance fee is usually due at contract signing. Sometimes, especially when a CCRC is under new construction, you may only be required to pay a 10% reservation fee with the remainder of the entrance fee due when you sign the contract.

Funding the entrance fee without loans

Savings

If you have enough money in your retirement savings such as money market accounts for the entrance fee, and still have enough money remaining to pay your monthly fee and other living expenses for the rest of your life then this is the least expensive way to pay the fee.

Investments

If you have stock and bonds, you could sell some of them to pay the entrance fee, however, that may have significant capital gains tax implications. Also, the stock and/or bond markets may be down so much when you plan to move into a CCRC that is not financially a suitable time to sell your holdings.

Selling your home

Most retirees own their homes and do not have any mortgage or lien on the home. Most times, the home is worth near, if not more, than the amount of the entrance fee. However, there may be consequences to selling your home to pay the entrance fee.

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income if you are single, and up to $500,000 if you file a joint return with your spouse.

In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years before its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5 years ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two years before the sale of your home. If you do not qualify for the exclusion, you must pay taxes on the capital gain from the sale of your main home.

You may have to sell your house during a housing price downturn and not receive the selling price you had expected. This can affect your being able to pay the entrance fee.

Life Insurance

Sometimes life insurance may be sold or converted to a long-term care payment benefit. This kind of transaction is usually referred to as a “Life Settlement.” If you have life insurance, contact a reputable financial advisor to see if this is a viable solution for you.

Funding the entrance fee with loans

Most people move into a CCRC with the goal of living out the rest of their lives relatively stress-free. In a CCRC most of the mundane, routine chores of living are taken care of by the CCRC such as lawn work, home maintenance, and cleaning, transportation to doctor appointments and grocery shopping (if needed), etc. This relieves you and your loved ones from having to do these things. To live stress-free, you also need to be debt-free; having a loan hanging over causes stress. Therefore, it is best to pay off any debt before retirement and not incur any new debt after you retire. That said, there are some options for financing all or part of a CCRC entrance fee.

CCRC financing

Some CCRCs will accept 10% down and allow you a year to sell your house to get the remainder of the money. However, you must sign a low-interest one-year note for the remainder of the fee and make monthly payments until you sell your house.

Bridge loans

A bridge loan is a short-term loan (usually less than a year) that allows you to pay the entrance fee while you wait for your home to sell, wait for some type of benefits to start, or wait to receive a settlement or inheritance.

Bridge loan pros:

You can enjoy all the benefits of living in a CCRC while waiting for your home to sell without the pressure to sell immediately.
The interest and fees for the bridge loan may be tax deductible.

Bridge loan cons:

It is a loan and thus it is a debt. Most people choose to live happily and stress-free in a CCRC and enjoy financial freedom by being debt free.
Bridge loans are expensive, in 2023 the interest rate is 10% or more.
If things go wrong in your life while the loan is in effect, you could lose your home.

Types of bridge loans

Home Equity Line of Credit (HELOC)

Instead of selling your home, securities, or assets to fund the entrance fee, which may leave you without a home for a period or generate capital gains taxes, you can use a HELOC to make the payment. Then, once you have moved into the CCRC, you can sell your home, pay off the HELOC, and close it.

The size of a HELOC is largely based on a banking lender’s review of the equity accumulated in your home, your loan-to-value ratio, your debt-to-income ratio, and your credit score. The interest rate is an adjustable rate based on the prime rate plus or minus a certain percentage set by the lender.

To qualify for a HELOC, you must:

Own a home (does not necessarily have to be your primary residence). An appraisal of the house may be required, as determined by the lender.
Pay an application fee, if applicable.
Be approved through an application process where the bank reviews the value of your home, bank and brokerage statements, tax returns, other existing debt, credit history, and assets owned overall.

Home Equity Conversion Mortgage (HECM)

A home equity conversion mortgage is a U.S. Department of Housing and Urban Development (HUD) program that allows homeowners to tap the equity in their homes without the need to sell their homes. HECMs offer homeowners aged 62 and above a line of credit with a growth rate commensurate with the increasing value of their homes. While HELOCs are fixed, HECM lines of credit can grow over time with no interest or principal payments required. HELOCs can expire or be frozen but HECMs are good for your lifetime; however, they often come with an exceptionally large upfront cost (tens of thousands of dollars).

Margin loan

A margin loan is a loan on your investment portfolio. If your investment accounts are enabled with margin capabilities, you can usually borrow up to 50 percent of the value of your investment portfolio. In effect, you are borrowing from yourself, using your securities as collateral. You use the loan to pay the entrance fee and then pay back the loan upon the sale of your home.

WARNING! If the security prices go down and you have borrowed too much on margin, there could be a margin call. This means that the broker demands the investor deposit additional money or securities into the account so that the value of the investor's equity (and the account value) rises to a minimum value indicated by the maintenance requirement. If you are not able to meet the margin call fast enough to satisfy your broker, it may be able to sell securities without your permission to make up for the shortfall. You will typically have two to five days to respond to a margin call, but it may be less during volatile market environments.

While a margin loan gives you the flexibility to create your own payback schedule, keep in mind that you will be paying interest on it, so the interest rate must be manageable for you. Margin interest rates are variable and partially contingent on the size and term of your loan. It is usually more cost-effective to get a margin loan at a time when the prevailing interest rate is low.

Personal loan

A personal loan is an expensive and very risky form of installment credit. Unlike a credit card, a personal loan delivers a one-time payment of cash to borrowers. Then, borrowers pay back that amount plus interest in regular, monthly installments over the term of the loan.

In most cases, personal loans are unsecured, which means you don't need to put up collateral to get approved. There are, however, secured personal loans, which require you to use a savings account or another asset as collateral in case you default.

Personal loans charge interest, usually a high rate. There may be other fees, such as an origination or administrative fee, which get taken out of your loan amount once you’re approved, or an early payoff penalty for paying the loan off before the end of your term (making the lender miss future interest payments).

Entrance fee and Medicaid

CCRCs entrance fees are typically placed in an escrow account. States consider these funds as countable resources when determining eligibility for Medicaid, if (1) the funds may be used to pay for care under the terms of the individual’s contract with the facility should other resources of the individual be insufficient; (2) the entrance fee (or remaining portion) is refundable when the individual dies or elects to leave the CCRC; and (3) the entrance fee confers no ownership interest in the community.