by Dave Horwedel, EA

A Story

I knew a lady in her late 60s who was in good health and frustrated she could not do what she wanted to do in her “golden years.”

She had worked hard all her life, mainly as a salesperson, and was still working in her own business, selling at fairs and such.

She was frustrated as she wanted to go to Florida for personal reasons.  She wanted to do what she enjoyed, and not be forced to work constantly.

Her credit was poor, and she could not get a traditional loan.

She still wanted to live in her home. She had many friends and even a couple tenants renting rooms who were friends.

I remember chatting with her about this and asked her who owned her home. She said she did. I asked her how much she owed on the home, and she said nothing. It was a small house in Hollywood, and she said it was worth $600,000.

I suggested she check out getting a reverse mortgage.  She did and got a reverse mortgage. This allowed her to do what she wanted to do.

Of course, this lowered the value of her inheritance to her adult children. They did not care. It was more important to them that mom was happy.

Home equity represents a significant portion of the average retiree’s wealth. If you’re 62 or older and house-rich but cash-poor, a reverse mortgage loan allows you to convert part of the equity in your home into cash – without having to sell your home.

Who Qualifies for a Reverse Mortgage?

To be eligible for a reverse mortgage, generally you must:

• Be 62 years of age or older.
• Either completely own your home or have adequate equity
• Live in the home.
• Be able to pay property taxes and other expenses associated with the property, such as homeowners’ insurance, maintenance and repairs, and any homeowners association fees.

Benefits of a Reverse Mortgage

The primary benefit of a reverse mortgage is that it allows eligible homeowners to keep living in their homes and use their equity for whatever purpose they choose. Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination of these.

Reverse mortgages differ from home equity loans in that most reverse mortgages do not require repayment of principal, interest, or servicing fees if you live in the home. Instead, the loan is repaid when you die or sell the home.

The proceeds of a reverse mortgage generally are tax-free, and interest on reverse mortgages is not deductible until you pay off the debt. When you die or move out, the loan is paid off by selling the property. Any leftover equity belongs to you or your heirs.

Maximum Loan Amounts

Maximum loan amounts range (depending on the lender) from 50% to 75% of the home’s fair market value. The general rule is that the older the homeowner and the more valuable the home, the more money will be available. All reverse mortgages have nonrecourse clauses, meaning the debt cannot exceed the home’s value.

Maximum loan amount limits are based on the value of the home, the borrower’s age and life expectancy, the loan’s interest rate, and whatever the lender’s policies are.

Other Considerations

If you plan to move in a few years or there is a possibility you will have to move due to some unforeseen circumstance, then a reverse mortgage may not be a good fit.

Selling your home might give you more flexibility.  Also, remember that the homeowners’ exclusion exempts a single person from tax on the first $250,000 profit, and a married couple on the first $500,000. You must have lived in and owned the house for at least two of the last five years.

Also, if you want to give your heirs a boost, be aware that a reverse mortgage reduces the value of any inheritance.

The bottom line is that the home is yours to do as you wish. If you do not need the money and have doting children and grandchildren dropping by to brighten your later years, maybe you want to let them inherit the home unencumbered by a mortgage.

An inherited home can be a big boost to an heir, especially one who has not been able to buy their own home. Maybe this gives you more pleasure than extra cash for a world cruise.

On the other hand, if the kids have moved away and you are not strongly attached to your local community, maybe you want to sell the home outright and relocate, perhaps nearer your family or to an area you like better.

I am from California and moved to Nevada. Many of my Californian friends sold their homes and moved to Nevada, Florida, or Texas. They wind up with bigger, nicer homes and a pile of money in the bank. They also wind up in states with no state income tax.

In addition, if you move from LA area to Vegas (or from San Francisco area to Tahoe) it is only a few hours drive to go back and visit friends there.  Californians seem quite happy to visit Las Vegas and Lake Tahoe.

Their contributions to the local economy are perhaps one reason Nevada does not need a State Income Tax!

Reverse mortgages are a tool that may be the answer for some house-rich and cash-poor retirees.

The key question is whether you want to stay in your home. If you like your home, your friends, and your family live locally, then a reverse mortgage makes sense.

If your family has relocated to another state, then selling and buying a home there might be a better

Questions?

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