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In comparing these two loan products, there are several factors to consider. For some, the option Arm would be like a ticking time bomb – it is only a matter of time before the low monthly mortgage payment would be replaced by a large monthly payment. If the senior does not have an abundance of income and wants to stay in their home for many years to come, then the option ARM would be a poor choice. On the other hand, the reverse mortgage carries the guarantee of no mortgage payments for as long as the homeowner lives in the home.

Qualifying for the reverse mortgage is much easier than qualifying for the option ARM. The reverse mortgage does not require any income, assets (other than home equity) or minimum credit score. The option ARM does require those items, even if they only must be “stated” on the forms by the borrower. Caution: never consider lying about the amount of income or assets. Despite what an eager broker might say, such an action carries potential loan-fraud consequences.

Coming up, Part 5

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.

This is the third post in a series.

Now let's look at a few of the situations where the reverse mortgage makes perfect sense. Clearly, if the senior could benefit from extra monthly cash flow in any way, the reverse mortgage is a potentially good option. AARP reports that 44% of people over age 60 have saved less than $75,000 for retirement and cite social security as their primary source of income. Fortunately, these numbers exclude home equity. With life expectancy much greater today than 20 years ago, it is evident that many seniors simply do not have enough money to fund their lengthy golden years. For them, the cash flow or a home-equity line of credit "nest-egg" from a reverse mortgage could be a great thing.

In many cases, health and related expenses become an issue. Some seniors have had many relatively care-free years, depending on their social security income and a little savings to cover their bills. But recently medical issues have started cropping up and as time marches on, the potential of more problems only increases. The senior might try applying for long term care insurance, but find that the opportunity passed back when they were 50 years old and healthy. Now the prospects of paying for proper medical care (even the deductibles), in-home care, and prescription drugs are daunting. The smart and prudent move would be to plan ahead and obtain the reverse mortgage in order to be financially prepared.

As a lump sum, the senior could use the reverse mortgage to pay off an existing mortgage, and increase their monthly cash flow by hundreds, or even thousands of dollars each month. Or they could use it to pay for home upgrades to improve the accessibility and mobility in the home. Some have even used the lump sum to purchase a second vacation home! There are a million uses for additional funds.

This is a continuation of yesterday’s post on your reverse mortgage and tax consequences.

If you (like most seniors), choose not to pay the interest that accrues on the reverse mortgage, the tax deduction is deferred until a later date. How much does that cost in income taxes? Probably not much. To give you an idea, multiply your tax rate by the total interest deduction that you took last year.

For example:
Income Tax Rate: 15%
Mortgage Interest Paid: $5000
15% of $5000 = Total Cash Savings: $750
Divided by 12 months = monthly savings $62.50

Based upon this example, the total monthly cash savings from the interest deduction is $62.50. This is a pittance when compared to the benefit of receiving payments instead of making them. But if you need that interest deduction in any given year, you can always make payments on your reverse mortgage. Financially astute clients of ours have used this fact to their tremendous advantage.

As mentioned above, if you do not make any payments, you don't actually LOSE the interest deduction - you just save it for later. Whether or not you have an existing mortgage to eliminate, the interest deduction is deferred until the reverse mortgage is paid off. If you were to sell the house or get a big inheritance, then you could use that deduction to offset your capital gains or inheritance tax. Or the interest deduction passes to your estate so your heirs pay less in taxes. To find out how much interest would accrue over time on a reverse mortgage, ask your lender or reverse mortgage counselor for an amortization table.

If the tax ramifications are a big concern for you, please contact a tax expert.