Putting a Mortgage Into Reverse
Pros and Cons of Technique for Homeowners
For some homeowners in a tough spot, it may make sense to “back into” a
reverse mortgage. In brief, this financial-planning technique allows you to
tap the equity that has been building up in your principal residence over
the years. It may be used to help pay expenses of elderly people during
retirement or to free up cash for medical procedures or other unexpected
emergencies.
Instead of a conventional mortgage where you pay the bank (or another financial institution) each month, the bank pays you. That is why it is called a “reverse” mortgage.
How it works: A reverse mortgage is the direct opposite of a conventional mortgage. With a conventional mortgage, you receive a lump sum that is combined with your down payment. Then you repay the loan principal, plus interest, through installments over a period of time (e.g., 15 or 30 years).
Conversely, with a reverse mortgage, the lender provides you with monthly payments based on the appreciated value of your home. Thus, you can benefit from your build-up in equity on the home while you are still living there.
Note that a homeowner must be at least age 62 to qualify for a reverse mortgage. If you are married, both you and your spouse have to meet this age requirement.
The actual amount you are eligible to receive each month depends on a number of factors, including:
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Your age and life expectancy, or the ages and life expectancies of a married couple
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The current value of the residence
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The amount of the total equity you are relinquishing
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The length of the loan term
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The annual interest rate charged by the lender
As you might imagine, the older you are and the more your home is worth, the more money you are likely to receive. Because reverse mortgage payments are considered payments on a loan, they are not subject to federal income tax. In addition, the payments should not affect eligibility for Medicare or Social Security benefits.
Of course, there are various other considerations for homeowners. For instance, be sure to check out all the costs (e.g., points, appraisal fees, etc.) that are part of the deal. As an alternative, you may also want to consider a reverse mortgage that lets you retain some of the appreciated value in your home.
In addition, you might not be so quick to dip into the home equity you have worked so hard to establish. You might also consult with other family members who could be affected by this technique. Clearly, it could have long-term ramifications. Thus, this technique is not right for everyone.
Final words: You are legally required to have
financial counseling before you embark on a reverse mortgage. Make sure you
understand all of the implications before you commit to this type of
arrangement.
Wherewithal
is provided by Somerset for our clients and other interested persons
upon request. Since technical information is presented in generalized
fashion, no final conclusion on these topics should be made without
further review. For additional information on the issues, please
contact
a member of the firm. Somerset provides total financial solutions,
including accounting, assurance, information solutions, litigation &
valuation, tax, wealth management and management consulting services to
entrepreneurs and their businesses. This document is not intended or
written to be used, and cannot be used, for the purpose of avoiding tax
penalties that may be imposed on the taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
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