Reverse-Mortgage-Truth.com

This is the second post in a series.

If you need additional monthly cash flow, and there is any possibility that your funds will last less than a year, then it is time to assess all your options and obtain the money that you will need over the next several years. Which may mean that it is time to obtain a reverse mortgage. You do not want to get caught in a stressful last minute scramble for money and risk not having enough.

If you are going to use the funds that you have, make sure that you first consider the cost as compared to a reverse mortgage. If those funds have been in invested in stocks or a similar investment vehicle, you will probably owe capital gains taxes when you cash them out. The tax laws have become so complicated that you should talk to your tax expert to determine how much in taxes you will owe. Another cost of cashing in your investments is the loss of the future returns on those investments. Remember, the long-term return on stocks is about 11% per year – which, when compounded over time, can add up to a lot of lost money – far more than a reverse mortgage would cost you.

What if you are an heir and those investments belong to a senior parent? Then you need to consider the consequences of using those funds now versus avoiding capital gains taxes by waiting to inherit the funds. How does that work? Generally, when you inherit an asset that has increased in value, you enjoy the benefit of a stepped-up basis in that asset and thus no capital gain. Here’s an example:

Mom bought stock 20 years ago for $1000. $1000 is her basis in that stock. Today, that is worth $10,000. If she were to sell it, she would have a capital gain of $9000. That means she must pay capital gains taxes on $9000. But, when the heir inherits the $10,000 in stock, his basis is $10,000. So assuming he sells it before it appreciates more, he will have $0 in capital gains taxes! You should consult a tax expert to confirm all tax-related issues for your specific circumstances.

Check here to find out what reverse mortgages California cost.

There are many seniors over 62 on a fixed income that need more cash for living expenses, have a desire for a better lifestyle or decide that they want to help out a relative. When they tell someone about it, they receive all kinds of advice, some good and some uniformed. Frequently, they choose an alternative to the reverse mortgage without considering all the costs and consequences. In this blog series, we’ll take a look at the most common alternatives to the reverse mortgage.

Selling Your Home
One alternative is to sell the home and move, pocketing the proceeds. A senior could downsize and buy a cheaper home, choose to rent an apartment, or move in with her kids. Seniors may be tempted by the promise of huge sums of cash in exchange for their home and might choose to sell rather than do a reverse mortgage.

But don't make that decision without first adding up all the costs. For the hard costs, you'll generally pay 5-6% of the sale price to real estate agents, you may owe hefty capital gains taxes on the sale, and you'll probably pay professional movers. If you downsize, your next home may have much higher property taxes because it will cost much more than you originally paid for your current home. You may need to spend a lot of money to fix up your existing home in order to sell it and/or to fix your new one to make it livable.

There are also intangible costs to consider. You'll have to find a new home where you will really be satisfied, hire a real estate agent and host open houses, and sort through and move everything that you own. You may also be moving away from all that is familiar such as friends, hospitals, pharmacies, and other services. If you're planning to rent rather than buy another home, you're losing out on future home appreciation and will be paying ever increasing rental rates. As far as moving in with the kids, I think the intangible costs are self-explanatory.

Selling your home may be a better alternative to the reverse mortgage, but make sure to add up the costs first. We’ll evaluate another common alternative tomorrow.