Reverse Mortgages – A Tax Free Income For Seniors
Reverse Mortgages – A Tax Free Income For Senior Citizens
I fully realize if it sounds too good to be true, it probably is and There Ain’t No Such Thing As A Free Lunch (TANSTAAFL) immediately jumped into your head when you read the title of this article. However, if you are 62 or over, you may have just found a loophole for you and not just the ones you hear about for all those large corporations.
A reverse mortgage is exactly what the name implies. Rather than you paying a monthly mortgage to your mortgage (lender) company, a mortgage company pays you. How is that possible you might ask? Well we are about to tell you.
There are three types of reverse mortgages and all have the same eligibility requirements.
- single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations.
– cheapest, but the loan agency dictates what the loan monies will be used for. - federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs)and backed by the U. S. Department of Housing and Urban Development (HUD)
– may be more expensive than traditional home loans, and the upfront costs can be high
– you must use a government counselor, moore information can be found at:
http://www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm - proprietary reverse mortgages, private loans that are backed by the companies that develop or package them.
– similar to traditional mortgages in terms of costs, fees, etc, shop around
You must be at least 62, live in, and own, your home and sign a reverse mortgage contract. You must also have equity in your home (difference between what you owe and what your home is worth) and the inherent interest rate is based on what the lender is currently charging (more about this later) on non-reverse mortgages. The lender, by the way, will also have your property appraised for which you may or may not be charged.
Reverse mortgages are loan advances and they are not taxable, and generally don’t affect your Social Security or Medicare benefits but again consult with your own accountant or financial adviser so they can advise you on your situation.
Some misconceptions:
- Yes you retain the title to your home
- Depending on how your loan/advance is structured you may or may not have to make monthly repayments.
- The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.
There are no income restrictions such as those imposed by Social Security and most are tax free since they do not involve additional features such as an attached annuity. They also do not affect your social security benefits nor your Medicare entitlements. You should always consult a tax professional so they can properly advise you on your own tax situation.
Should you wish to know more about reverse mortgages with additional features, consult with a competent tax professional.
The FTC’s website, http://www.consumer.ftc.gov/articles/0192-reverse-mortgages has an excellent article on reverse mortgages .
If you do this search or click on this link there are a list of great articles on the FTCs website
This financial instrument called a reverse mortgage is actually a loan or advance against your home’s future value, which allows senior citizens, to convert part of their equity into cash without having to sell their home. Because it is a loan “in reverse” you are receiving a monthly sum and not paying a monthly amount while you live in your home. This is a great way to take advantage of what may be your most valuable retirement asset.
However, this loan must be repaid and repaid with interest (the lenders profit) should you sell, die, no longer live their as your principal residence or reach the end of the pre-selected loan period. You remain responsible to pay real estate taxes, insurance and all your upkeep maintenance expenses which, of course, you would have to pay with, or without, a reverse mortgage.
It doesn’t take a rocket scientist to realize anyone who is cash poor but house rich should at least investigate this tool. However, like any other instrument involving your signature on the dotted line involving financial obligation, you must have some preliminary information.
I mentioned earlier there are three types of reverse mortgages. The first is the single purpose reverse mortgage. These are offered by some sate and local government agencies and nonprofit organizations.
They may not be available in your area. Call your county’s Department of Senior Services. Their phone number is in the white pages under the listing for your county.
Single purpose means exactly that. The proceeds may be used for only the purpose specified by the lender and generally are only made to people with low or moderate incomes. If you call your county, be sure to ask if their reverse mortgage is a single purpose and what are the limits.
The second type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). The federal government insures these mortgages and they are backed by the Department of Housing and Urban Development (HUD). The up front costs are generally high especially if you plan on staying in your home for a short period of time but they carry no income or medical restrictions and can be used for any purpose.
HECMs also require all applicants to meet with a counselor from an independent government approved housing counseling agency. The FTC says, “The counselor must explain the loan’s costs, financial implications, and alternatives. For example, counselors should tell you about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area.”
An additional benefit of an HECM mortgage is the nursing home clause. Should a borrower have to move out of her home and into a nursing home or other medical facility, she has up to 12 months before the loan becomes due. This enhances financial planning.
The third type is called a proprietary reverse mortgage. These are private loans backed by the companies offering them. In other words, they are NOT government insured. Like HECMs, the upfront cost could be high for a proprietary reverse mortgage.
A reverse mortgage, cost wise, is like a traditional mortgage. The lender usually charges loan origination fees, closing costs, insurance premiums (for insured loans) and service fees which are all set by the lender.
Fortunately, like traditional mortgages, the federal Truth In Lending Act (TILA) applies to reverse mortgages.
http://www.fdic.gov/regulations/laws/rules/6500-1400.html
This means the lender MUST disclose the costs and terms of the reverse mortgage you are considering.
The annual percentage rate (APR) and payment terms must be prominently displayed and not in the fine print. If you choose a credit line as your loan, lenders must tell you the charges related to not only opening but using this credit account.
Another word about the interest rate since it too mirrors the traditional mortgage. Just as with a standard mortgage, an interest rate can be fixed or variable with variable rates tied to a financial index. This means the rate will change as the index changes.
TILA forces the lender to disclose this information. TILA does not force the lender to tell you the reverse mortgage may, or may not, use up all of your equity. If a “non-recourse” clause is included in the contract, and most have them, you must be told you will not owe more than the value of your home when the loan is repaid. This is a good thing.
Of the three, the HECM is the most flexible. It lets you select the way you receive your money. For example, you can receive fixed monthly cash advances for a specified period or for as long as you live in your home. Or, if you choose, you can receive a line of credit.
A line of credit allows you to draw on the loan proceeds when you want and how much you want. The HECM allows a combination of the two choices. You can receive a monthly payment plus a line of credit.
The key is to read and understand every clause in the contract before signing and do not be afraid to ask questions about what you don’t understand. Don’t let a huge monthly payment cloud your judgment and decision making ability.
Both HUD and the FTC have toll free numbers and websites to help you in making an informed decision. HUD can be called at 1-888-466-3487 with their web address at:
http://portal.hud.gov/hudportal/HUD while the FTC can be called at 1-877-382-4357 with their web address at: http://www.ftc.gov/credit
We can help, feel free to give us a call and talk to one of our senior reverse mortgage advisors