Reverse Mortgage Loans: 6 Things You Need To Talk About
A reverse mortgage is a home equity conversion mortgage (HECM). It also provides a loan available to seniors 62 years or older, complete with closing costs, a payback, and multiple give-and-takes. Most seniors who consider a reverse mortgage use the additional funds to supplement Social Security and other retirement income that falls short of meeting their expectations and needs.
Should you consider a reverse mortgage?
Maybe. But before you talk with a loan company or counsel with HUD, there’s another important conversation you should have with your personal CPA financial and tax specialist. You must have a clear understanding as to how a reverse mortgage fits into your overall financial and life goals.
Start with the basics.
You could be eligible for a reverse mortgage if:
- You are 62 years of age or older
- You own your home and use it as your primary residence
- The house is a single family, multi-family (max of 4), or an approved condominium or manufactured home
- You own your home free and clear or only have a small amount left to pay on the existing mortgage
- Your home is in good condition prior to taking out the loan
To further determine qualifications, you must meet with a HUD-approved counselor and undergo a financial assessment to determine if you can pay for:
- Property taxes
- Homeowner’s insurance
- Basic home maintenance
- HOA fees if applicable
The conversation you must have about reverse mortgages.
Several of my clients have come to me for this conversation. We always end up talking very frankly about how this step will affect their overall financial situation and lifestyle. On the surface, a reverse mortgage seems to be a sensible solution to complicated issues. But there’s more to it!
6 Things we need to talk about:
- How long you plan to live in your home. A reverse mortgage is actually a loan based partly on the amount of equity you have in your home. There are front-end charges such as appraisals, inspections, origination cost, insurance, etc., which generally must be paid before the loan is approved. These costs could outweigh any potential benefits if you don’t live in your home long enough to offset these amounts.
- When and how you get your money. Your reverse mortgage feels something like a “backward” loan since you get paid, instead of making payments. Generally, the lender pays you a certain amount each month, which the IRS refers to as a “monthly advance.” You may also have the option to receive a lump-sum, a line of credit or a combination of all three distributions. Be aware that with changing interpretations of the Tax Cuts and Jobs Act of 2017, your choice could have conflicting tax consequences.
- Taxability of your monthly advance. The effects of the new IRS and SALT tax laws are still uncertain relative to all reverse mortgage loans. Since the money you receive (probably on a monthly basis) is considered to be an advance rather than income, the IRS doesn’t consider it as taxable income.
- Accountability of your monthly advance. You don’t hear much about this. The monthly advance doesn’t affect benefits such as Social Security and Medicare. However, the addition of these monthly advance funds could change your qualifications for receiving “needs based” state or local assistance.
- When and how the loan becomes due. Your reverse mortgage feels like a backward loan because it is. You receive a monthly payment each month along with a statement showing the amount of interest that accrues which you ‘defer’ until the home is sold when the loan reaches maturity. As long as you have enough equity built up, all borrowers on the loan continue to live in the home as the primary residence, and you continue paying your property taxes and insurance, you can take advantage of the mortgage. Depending on the tax laws at the time, the IRS may or may not allow your interest to be tax deductible.
- Your home and your heirs. You can generally make payments back on your reverse mortgage and pay off the entire loan at any time with cash, refinancing or selling. Otherwise, your reverse mortgage is not due or matured until the last surviving borrower passes away or the property is no longer the primary residence. Your heirs will have time (12 months) to sell the home or pay the balance of the loan. Generally, if your heirs can’t agree, are unable or choose not to act, the lender will foreclose on the home. If the sale doesn’t pay off the loan balance, the government insurance you purchased at loan closing will cover your estate and the lender will be reimbursed for any shortfall. A reverse mortgage is designed so that the amount owed cannot exceed the value of the home. Any equity gained belongs to the borrower or the borrower’s estate.
Are you sure a reverse mortgage is right for you?
Think how each of these issues could affect other aspects of your life. What is the condition of your health? Your spouse’s health? How does this fit into your current tax strategy? Are there other options which could make your retirement more comfortable and fun? Have you been up-front with the executor of your Last Will and Testament and are you willing to have this discussion with that person?
What’s the bottom line?
Your personal relationship with your CPA financial and tax specialist is more than filing taxes or receiving newsletters, emails, and cards from our office during the year. It’s an ongoing, life-oriented relationship that puts a top-tier Chief Financial Officer at the table of your life-goal planning and strategy sessions.
If you’ve never consulted a CPA tax, financial and business management specialist or considered setting a course based on strategic tax planning for your personal life, now is the time to do it. Tax laws and opportunities have changed dramatically and will continue to do so. Stay prepared, flexible and in control.
Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.
Call us at 479-668-0082. Use my Calendy Page (it’s easy) to set an appointment or email us.
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