So, you have heard of Reverse Mortgages, but do you really understand what they are and how they can be helpful? Like most things – you hear good and bad comments about them.
A reverse mortgage is unlike a purchase money mortgage or a refinance mortgage. So, what’s the difference?
When someone buys real estate, they may secure the funding for the same by way of a purchase money mortgage to finance the purchase. A refinance mortgage is one where there is already a mortgage secured by real estate, but there may be a reason to refinance – lower interest rates, shorter term equity from the property. In each of those cases, payments begin usually about a month after the mortgage has been disbursed or closed.
Whereas, a reverse mortgage is one in which the payments do not begin at the time the mortgage is funded. The mortgage is not disbursed in full. Rather, the mortgage paperwork is done and no withdrawal of funds is made until requested. Payments can be either on demand or on a periodic basis. Interest accrues on the mortgage and is added to the principal but no payments are required until the date set forth in the terms of the loan. Usually, no payment is due until the borrower dies or permanently moves from the home. At that time, the payoff will be only based on funds actually received, not on the maximum amount allowed to be withdrawn.
Unlike conventional financing, reverse mortgage eligibility is geared specifically for lower income seniors. Other eligibility qualifications are that the borrower must be at least 62 years old, the maximum amount that can be borrowed is limited to a percentage of the value of the home and your equity is the same due to existing encumbrances on the property.
If you have a loved one who owns their residence and is in need of cash for their care, careful consideration should be given to selling their home and relocating or remaining in their home and getting a reverse mortgage. This is important if there could be capital gains tax if the property is sold. While the IRS has provisions to shelter gains of up to $250,000 per individual, New Jersey and Pennsylvania do not have the same exclusion and could result in significant taxes. Currently, if someone dies owning real estate at the time of their death, a “step-up” in basis is given to the value at the time of death. The amount of the “step-up” in basis is determined by how the real estate is owned.
If you feel a reverse mortgage may be something that could help a homeowner, just as with most things – do your homework. Investigate the current rates, the repayment terms, and the costs involved in putting a reverse mortgage in place. Compare the options of a reverse mortgage vs. a home equity line of credit. What are the income requirements for the various types of loans? What are the tax consequences?
Only then will an educated determination be able to be made in the best interest of the homeowner.