Reverse Mortgages A Tax Free Income For Senior Citizens

Reverse Mortgages A Tax Free Income For Senior Citizens



I fully realize if​ it​ sounds too good to​ be true,​ it​ probably is​ and There Ain’t No Such Thing as​ a​ Free Lunch (TANSTAAFL) immediately jumped into your head when you​ read the​ title of​ this article. However,​ if​ you​ are 62 or​ over,​ you​ may have just found the​ goose that laid the​ golden egg.

A reverse mortgage is​ exactly what the​ name implies. Rather than you​ paying a​ monthly sum of​ money to​ a​ mortgage company,​ a​ mortgage company pays you. There are three types of​ reverse mortgages and all have the​ same eligibility requirements.

You must be at​ least 62,​ live in,​ and own,​ your home and sign a​ contract. you​ must also have equity in​ your home and the​ inherent interest rate is​ based on​ what the​ lender is​ currently charging (more about this later) on​ non-reverse mortgages. the​ lender,​ by the​ way,​ will also have your property appraised for which you​ may or​ may not be charged.

There are no income restrictions such as​ those imposed by Social Security and most are tax free since they do not involve additional features such as​ an​ attached annuity. They also do not affect your social security benefits nor your Medicare entitlements.

This article discusses only those mortgages without additional features. Should you​ wish to​ know more about reverse mortgages with additional features,​ consult with a​ competent tax professional to​ reduce the​ chances of​ running afoul of​ tax laws.

The FTC’s website,​ http://www.ftc.gov/bcp/online/pubs/homes/rms.htm has an​ excellent article on​ reverse mortgages but it​ also does not discuss mortgages with additional features. Another reason to​ consult with a​ tax professional.

This tool called reverse mortgage is​ actually a​ loan,​ hence an​ interest rate,​ which allows senior citizens,​ or​ as​ some say,​ the​ elderly,​ to​ convert part of​ their equity into cash without having to​ sell their home. Because it​ is​ a​ loan “in reverse” you​ are receiving a​ monthly sum and not paying a​ monthly amount while you​ live in​ your home.

However,​ this loan must be repaid and repaid with interest should you​ sell,​ die,​ no longer live their as​ your principal residence or​ reach the​ end of​ the​ pre-selected loan period. you​ remain responsible to​ pay real estate taxes,​ insurance and all attendant maintenance expenses which,​ of​ course,​ you​ would have to​ pay with,​ or​ without,​ a​ reverse mortgage.

With this explanation,​ the​ picture becomes more focused,​ right? you​ enjoy a​ monthly sum,​ tax free and non-repayable until a​ date sometime in​ the​ future,​ while remaining in​ your home. as​ close to​ a​ win-win situation as​ one can get in​ this day and age.

It doesn’t take a​ rocket scientist to​ realize anyone who is​ cash poor but house rich should at​ least investigate this tool. However,​ like any other instrument involving your signature on​ the​ dotted line involving financial obligation,​ you​ must have some preliminary information.

I mentioned there are three types of​ reverse mortgages. the​ first is​ the​ single purpose reverse mortgage. These are offered by some sate and local government agencies and nonprofit organizations.

They may not be available in​ your area. Call your county’s Department of​ Senior Services. Their phone number is​ in​ the​ white pages under the​ listing for your county.

Single purpose means exactly that. the​ proceeds may be used for only the​ purpose specified by the​ lender and generally are only made to​ people with low or​ moderate incomes. if​ you​ call your county,​ be sure to​ ask if​ their reverse mortgage is​ a​ single purpose and what are the​ limits.

The second type of​ reverse mortgage is​ called a​ Home Equity Conversion Mortgage (HECM). the​ federal government insures these mortgages and they are backed by the​ Department of​ Housing and Urban Development (HUD). the​ up front costs are generally high especially if​ you​ plan on​ staying in​ your home for a​ short period of​ time but they carry no income or​ medical restrictions and can be used for any purpose.

HECMs also require all applicants to​ meet with a​ counselor from an​ independent government approved housing counseling agency. the​ FTC says,​ “The counselor must explain the​ loan’s costs,​ financial implications,​ and alternatives. For example,​ counselors should tell you​ about government or​ nonprofit programs for which you​ may qualify,​ and any single-purpose or​ proprietary reverse mortgages available in​ your area.”

An additional benefit of​ an​ HECM mortgage is​ the​ nursing home clause. Should a​ borrower have to​ move out of​ her home and into a​ nursing home or​ other medical facility,​ she has up to​ 12 months before the​ loan becomes due. This enhances financial planning.

The third type is​ called a​ proprietary reverse mortgage. These are private loans backed by the​ companies offering them. in​ other words,​ they are NOT government insured. Like HECMs,​ the​ upfront cost could be high for a​ proprietary reverse mortgage.

A reverse mortgage,​ cost wise,​ is​ like a​ non-reverse mortgage. the​ lender usually charges loan origination fees,​ closing costs,​ insurance premiums (for insured loans) and service fees which are all set by the​ lender.

Fortunately,​ like non-reverse mortgages,​ the​ federal Truth in​ Lending Act (TILA) applies to​ reverse mortgages. This means the​ lender MUST disclose the​ costs and terms of​ the​ reverse mortgage you​ are considering.

The annual percentage rate (APR) and payment terms must be prominently displayed and not in​ the​ fine print. if​ you​ choose a​ credit line as​ your loan,​ lenders must tell you​ the​ charges related to​ not only opening but using this credit account.

Another word about the​ interest rate since it​ too mirrors the​ non-reverse mortgage. Just as​ with a​ non-reverse mortgage,​ an​ interest rate can be fixed or​ variable with variable rates tied to​ a​ financial index. This means the​ rate will change as​ the​ index changes.

TILA forces the​ lender to​ disclose this information. TILA does not force the​ lender to​ tell you​ the​ reverse mortgage may,​ or​ may not,​ use up all of​ your equity. if​ a​ “non-recourse” clause is​ included in​ the​ contract,​ and most have them,​ you​ must be told you​ will not owe more than the​ value of​ your home when the​ loan is​ repaid. This is​ a​ good thing.

Of the​ three,​ the​ HECM is​ the​ most flexible. it​ lets you​ select the​ way you​ receive your money. For example,​ you​ can receive fixed monthly cash advances for a​ specified period or​ for as​ long as​ you​ live in​ your home. Or,​ if​ you​ choose,​ you​ can receive a​ line of​ credit.

A line of​ credit allows you​ to​ draw on​ the​ loan proceeds when you​ want and how much you​ want. the​ HECM allows a​ combination of​ the​ two choices. you​ can receive a​ monthly payment plus a​ line of​ credit.

The key is​ to​ read and understand every clause in​ the​ contract before signing and do not be afraid to​ ask questions about what you​ don’t understand. Don’t let a​ huge monthly payment cloud your judgment and decision making ability.

Both HUD and the​ FTC have toll free numbers and websites to​ help you​ in​ making an​ informed decision. HUD can be called at​ 1-888-466-3487 with their web address at:
http://www.hud.gov/offices/hsg/sfh/hecm/rmtopen.cfm while the​ FTC can be called at​ 1-877-382-4357 with their web address at: http://www.ftc.gov/credit

After reading the​ above information you​ may have decided the​ goose with the​ golden eggs is​ really a​ vulture waiting to​ pounce on​ your carcass. Or,​ you​ may have decided the​ goose’s eggs are worth your time and attention. Either way,​ you​ are now a​ more informed consumer.

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