Personal Finance

Money Matters: Advice for a homeowner considering a reverse mortgage

Q. I’ve been blessed with wonderful children, grandchildren, friends, community and a pretty long life which, good Lord willing, will continue for many more years. I live in a resort area and in years past, one or more of my children were interested in having this home as part of their inheritance as a second home. As the years have gone by, I guess they all got tired of waiting for me to croak and now they all have their own vacation homes and are no longer interested in owning mine. I’m pretty sure they’d just sell it and divide the proceeds so I’m thinking about either donating it to a charity or taking a reverse mortgage. If I donate the home to charity, I’d like to do so now to get the tax deduction while living which would free up some money that doesn’t to go to Uncle Sam but I’d want to remain in the house until they wheel me out of here in a horizontal position. The reverse mortgage would also free up some money now which would allow me to donate cash to charity and/or do some more gifting to the children/g-children while living. Would you give me your opinion on these thoughts and an explanation of how they would work?

A. I hope you continue living your blessed life for many years to come. If you want to free up some cash by using the equity in your home, both of your ideas are sound.

If you are charitably minded and in a high tax bracket, donating your house and saving on taxes may make a lot of sense. This type of gifting works best if there is not a mortgage or lien on your home. You would need to obtain a qualified appraisal of your home and the charity must review and approve the transfer. The ownership of the home would be transferred to the charity and you would retain a life estate which would allow you to live in the house for the rest of your life, a certain number of years, or a combination of the two. You would be responsible for all taxes, insurance and structural maintenance. You will receive a charitable income tax deduction based on the fair market value of your home less the present value of the life tenancy you retain. You’d also need to address what will happen if you decide you no longer wish to or are unable to continue to live in your home.

A reverse mortgage offers more flexibility for you to donate to multiple charities and make gifts to children/grandchildren while living. The federally insured Home Equity Conversion Mortgage, or HECM Saver, allows you to establish a credit line but not draw on it until funds are needed. You can chose when to make interest payments including deferring any payments until your home is sold. When your home is sold, you pay off the balance of the loan and the proceeds are retained for you or your estate.

The HECM Saver is less expensive than a standard reverse mortgage but the amount of money available to you is lower. The amount of the initial mortgage insurance premium is 0.01 percent of the maximum claim amount. The claim amount is the lesser of the sales price, appraised value or Federal Housing Administration (FHA) mortgage limit of $625,000. With the standard HECM the initial mortgage insurance premium (MIP) is 2 percent of the maximum claim amount but you can borrow a larger amount of money based on the equity in your home. According to the National Reverse Mortgage Lender’s Association, HECM Saver will give you approximately 10 to 18 percent less money than the HECM standard. Over the life of the loan you will also be charged an annual MIP equal to 1.25 percent of the loan balance.

Both the HECM Saver and the standard HECM allow you to keep title to your home. Both are a way to turn the equity in your home into cash. Payments can be taken in several different ways. They may be taken as a line of credit, a lump sum, monthly payments for a specified number of years, or payments for the life of the borrower. The selected payment method will have a major impact on the amount of money you will receive. The amount of cash or credit line you will receive will depend on your age, the value and location of your home, current interest rates, origination fees, settlement costs and the reverse mortgage program you select. Higher cash amounts go to older borrowers owning high value homes and lower cash amounts to younger borrowers living in modestly priced homes.

To qualify for this type of loan, all borrowers in the household must be at least 62 years old and the home must be totally, or nearly, paid off. Usually the home must be your principal residence; this requirement is met if you live there more than half the year. You must also participate in a consumer information session given by a HUD approved HECM counselor.

You can search on-line for a counselor or call 800-569-4287.

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