In Your Interest: Reverse Mortgage

There are a lot of commercials on television regarding reverse mortgages. They are promoted as a great way for homeowners with little or no debt on their home to be able to supplement their income for the rest of their lives by using their home equity. They have come a long way from when they were first introduced, and therefore are more attractive than they used to be.

The reverse mortgage works like this: A homeowner contracts with a financial institution, such as a bank, that does reverse mortgages. The institution charges an upfront fee which is typically higher than with a traditional mortgage, then charges a premium each month to cover the mortgage insurance. The institution then makes payments to the homeowner on a monthly basis or other arrangement. The institution is paid back when the owner either moves or dies, and the home is sold. The homeowner is still responsible for maintenance, upkeep, property taxes, and insurance. There are no credit or income qualifications, and all upfront costs can be financed. The amount loaned to the homeowner is typically less than what could be borrowed with a traditional mortgage. This is because the institution takes the loss if the loan balance is higher than the home value at the time it is sold. However, if the loan balance is less, the heirs receive the difference.

This could be a little-to-no-risk way to get extra cash. The risk would be for someone in bad health and a short life expectancy, because of the large up-front costs they may incur, as compared with the traditional mortgage. Also, a homeowner who already has an equity line of credit can borrow from it without incurring upfront costs, and payments can be made from borrowings.

The bottom line is to look at your financial situation and determine which is best for you. If you are interested in a reverse mortgage, shop around. For example, some institutions will give you the option of borrowing less, but incurring a smaller upfront fee, thereby potentially leaving more to your heirs and/or your church or other charity.

— In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.