Reverse Mortgages: A Worthwhile Idea Especially In Today’s Economy

Reverse Mortgages: A Worthwhile Idea Especially In Today’s Economy

A number of our older clients (as well as their children) have asked us recently whether a Reverse Mortgage might help them with cash flow in these difficult times. Below is a brief review of the subject.

These are indeed tough economic times, particularly for seniors who need additional cash flow to supplement their Social Security payments and Pensions. A senior who saw his or her home as a “nest egg” in retirement, may now view it as a financial albatross. With the costs of fuel, taxes, insurance, lawn care, snow removal, home maintenance and, in many situations, the payment of the mortgage itself, home ownership may feel more like a curse than a blessing. The real estate market is struggling and seniors cannot afford to sell their homes until the market improves. What can one do?

A possible answer for homeowners in this situation is a Reverse Mortgage. A Reverse Mortgage was once considered an expensive way of extracting cash from your home and fell largely out-of-favor. This trend appears to be changing. Many credit unions, for example, are cutting their closing costs thereby helping homeowners, even some affluent ones, who want or need to generate additional retirement income.

In a nutshell, Reverse Mortgages allow people 62 years of age and older to convert their home equity into cash. Instead of the homeowner writing a check to the bank each month, the bank actually pays the homeowner, who may elect to receive the proceeds as a lump sum or line of credit. With new reduced fees offered by some companies, homeowners may be able to save many thousands of dollars on closing costs.

With a Reverse Mortgage:

  • the homeowner, not the lender, retains title to the home;
  • the proceeds are tax-free;
  • the homeowner is not required to make any monthly mortgage payments;
  • the homeowner’s retirement income is increased; and,
  • the homeowner can use the money to pay increasing health-care costs, pay for long-term care, make home improvements and, of course, enjoy the additional income derived from the Reverse Mortgage.

Qualifying for a Reverse Mortgage

  • you must be the titleholder of the property;
  • all borrowers must be 62 years of age or older;
  • any prior mortgage balance must be paid off at the time of closing, but you can use the money from your reverse mortgage to pay it;
  • your home must be a single-family home, a multi-family home with 2 – 4 units (one of which units must be your primary residence), or a condominium.*
  • no income or credit qualifications are required; and,
  • the homeowner must go through mandatory HUD-approved counseling.

Reverse Mortgages are more and more recognized by active retirees as a viable option to supplement their retirement income and allow them to remain in their home. Talk to us about them. We’ll give you candid advice and help you determine whether you are a candidate for a Reverse Mortgage.

*Co-ops do not qualify for Reverse Mortgages


Why Do People Buy Homes Rather Than Just Rent?


During these uncertain financial times it is important for you to consider whether you should become a first-time home (or cooperative or condominium apartment) buyer.  Below are a number of reasons most people give for buying:

Appreciation in Value:  Although we appear to be in the midst of a down-cycle, over the years real estate has been fairly consistent in appreciating.  Homes have been considered a hedge against inflation over the years.  If history is any judge buyers can look forward to an up-cycle and the value of your investment increasing over the years.

Tax Benefits:   The real estate taxes on your residence (as well as a vacation home) will most likely be fully tax-deductible.  Mortgage interest payments are also fully deductible and help make home ownership a tax shelter.  Please note that interest payments on a fixed mortgage are greater at the beginning of ownership and therefore the deduction is greatest during the earlier years.

Capital Gain Benefit:  So long as you have lived in your home for two of the past five years you can exclude $250,000.00 ($500,000.00 for a married couple) of profit from capital gains.  Any profit greater than the above exclusion shall be taxed as a Capital Asset as long as you owned your home for more than one year.  Capital Assets receive preferential tax treatment.  As of this time, the tax on a capital gain is levied at 15% of such gain, far lower, in most instances, from tax on ordinary income.

Pride in the Ownership of Your Own House:  This is probably the number one reason why people buy a first home.  The feeling that you have full control on what you do in your own house from decoration, etc.  It also gives you and your family a sense of security and stability.

Accumulation of Equity:  As you make payments on your mortgage, the balance goes down and your equity increases.  While most of the initial payments on a fixed loan consist of interest on the mortgage, there is also some reduction of principal.  Principal payments reduce the amount of the loan and therefore increase the amount you will receive on a sale of the property.