Reverse-Mortgage-Truth.com

Should you get a reverse mortgage or would you be better off to just use your savings?

If you are considering a reverse mortgage, you will have looked at your savings, stocks, bonds and other liquid investments. But you may have some concerns about using those reserves. Are there ample funds to serve your purposes? What are the tax consequences for both you and your heirs of tapping those funds? If it is your heirs or other relatives who might be providing the funds, what do they need to consider?

One of the deciding factors in choosing whether or not to tap into your nest egg may not only be how long those funds will last you, but rather, how much they will cost you or your heirs.

The first questions to answer are:
1. How much money do I need?
2. Over what time period do I need it (do you need $1000 extra per month to cover your bills; or do you just need $20,000 one time to fix your roof)?
3. Given how much money I have, how long will it last and how much in reserve will I have left over?

I’ll write more on this topic tomorrow.

The following headline was sent in an email to mortgage brokers this morning from a major reverse mortgage lender:

10,000 Americans Are Turning 62 Everyday!
With a current market penetration of less than 2%, the Reverse Mortgage industry is taking off. Get in on the ground floor . . .

Sounds a bit like the great California gold rush of the mid-1800’s. Or perhaps like the great California home mortgage refinance boom of the early 2000’s.

Since 62 is the minimum age for the reverse mortgage, an additional 10,000 people per day being added to the market for potential reverse mortgage candidates certainly sounds like the gravy train that all mortgage brokers should not miss. But there’s a lot more to this than meets the eye.

How many of those who are newly 62 have at least 70% equity in their homes? That’s about what it takes to qualify for a reverse mortgage in California. Who has that much equity? It’s anyone’s guess as to the percentages, but it is highly probably that the majority of homeowners turning 62 have either bought their California homes recently with a large mortgage or have cashed out much of their home equity through refinancing.

And of that now dramatically smaller group, how many actually need a reverse mortgage in California? Homeowners do not get a reverse mortgage unless they have real reason. Some want to get rid of their mortgage payment for the rest of their lives. Others want a line of credit with no payment obligations so they can get a new roof or remodel the kitchen. But without a motivating factor, people do not change the status quo.

Still, 10,000 people per day is a huge number. Some of them will be good candidates for the California reverse mortgage. But will it be the next gold rush or home mortgage refinance boom? Only time will tell.

A common question among seniors is how the reverse mortgage affects their taxes. As always, you should consult your professional tax adviser to get iron clad answers - and I am not a tax advisor. So with the disclaimers out of the way, we think that you'll find the following to be straight-forward and logical.

The money that you get from a reverse mortgage is not taxable. Why? Reverse mortgage money is not income as far as the tax man is concerned. The money coming in from a reverse mortgage is already your money. It was just tied up in your home equity. Call it lazy money - it was just sitting there uselessly. The reverse mortgage frees up your lazy money so you now have access to it and can put it to good use.

When you work, you're earning money that is taxed. When you use money that is already yours, you typically do not.
If you have a traditional (forward) mortgage, what happens to the interest deduction that you were receiving each year for mortgage interest paid, when you get a reverse mortgage to pay it off? Interest is deductible when it is actually paid. So while interest accrues on the outstanding reverse mortgage loan balance, if you do not actually pay for any interest, there is no tax deduction. Instead, the deduction is deferred until the reverse mortgage is paid off (when the home is sold or refinanced).

But, remember that you can pay down your reverse mortgage at any time. And any payments that are applied toward interest are deductible just as they are with a regular mortgage. So think of the reverse mortgage as a way to free up your financial picture - you can still get the mortgage interest deduction if you want it.

More on this topic tomorrow!

We’re talking about the answer to: “Why not do a traditional refinance and pull cash out?” For continuity, first see yesterday’s post on the same subject.

Since you make no payments on a reverse mortgage, you can't lose your home for missing a payment. Now that provides you with a bit more security than a traditional loan that requires monthly mortgage payments, don't you think?

Adding to that security is the fact that with the reverse mortgage, you will never be required to re-qualify for the loan. Now what does that mean? Here's a little-known fact: since traditional mortgages require that you qualify based on income, assets and credit, the bank reserves the right to periodically "check up" on you to make sure that you still qualify for the loan. If after a couple years, you have used up some of the money from your loan, or spent down a significant part of your other savings, the bank may close the loan and require immediate and full repayment. This is "calling the loan". And we all know what happens if you cannot afford to repay a mortgage to the bank. There also have been recent reports in the media of lenders taking away the homeowner’s HELOC without warning due to declining home values and equity.

Tomorrow will discuss another risk of the traditional mortgage as an alternative to the reverse mortgage.