Reverse Mortgage Loan Basics

Reverse Mortgage Loan

Are you a senior strapped for cash? If your home has significant equity, a reverse mortgage loan may solve your dilemma. A reverse mortgage loan that keeps you in your home instead of selling a highly appreciated house may also save capital gains taxes.

Reverse Mortgage Loan Basics

Let’s look at the basic guidelines about reverse mortgage loans:

AGE

You must be at least 62 years old to qualify for a reverse mortgage.

LOAN AMOUNT

The limits on the amount you can borrow are based on:

• Value of your home
• Other mortgage debt against the property
• Your age – At 65, you can usually borrow about 25% on your home equity, climbing to 45% when you are 75 and about 60% if you are 85 or older

REVERSE MORTGAGE STRATEGIES

You may have fixed or variable interest rates, which are usually higher than a standard mortgage. The lender is entitled to a higher return because their money will be tied up for an undetermined, longer period of time without any repayment. You can take the proceeds three different ways:

• Lump sum
• Installments at an agreed interval
• Line of credit to draw on when you need the cash

FEDERAL INSURANCE

Most reverse mortgage loan products are insured by the federal government

REPAYMENT

As the term “reverse mortgage loan” implies, you don’t make payments. Interest is added so the total balance due continues to grow until the debt is repaid after a “triggering” event. Once you die or move, the home would be sold. Anything left after repaying the loan would go to you or your estate.

REVERSE MORTGAGE LOAN FEES

Most modern reverse mortgages are HECMs (home equity conversion mortgages), incurring loan fees higher than regular mortgages or home equity lines of credit, including:

• Origination Fee – 2% of the first $200,000.00 of the maximum claim amount (this figure varies, depending on your home’s value and the FHA loan limit for your area), plus 1% of the maximum claim amount above $200,000.00, not to exceed $6,000.00.
• First Year FHA MIP (mortgage insurance premium) – 2% of the maximum claim amount. Later, the annual MIP is reduced to .5% of the loan balance.
• Other Fees – The lender may charge a monthly servicing fee (usually $30 to $35). There will probably be the usual mortgage closing costs covering escrow settlement, appraisal, title insurance, etc., which are added to the reverse mortgage loan principal balance.
• Propriety Reverse Mortgage Products are a small part of the marketplace but those fees may vary widely from the standard shared above.

Reverse Mortgage Loan – The Right Choice For You?

Whether or not this is the right choice for you depends a lot on your own health, wants and needs, finances, and the estate you wish to leave your heirs.

Reverse Mortgage Loan versus Selling Your Home

If you have heirs that factor into your decisions, you’ll want to consider the impact of state and federal capital gains taxes if you sell your home now, versus the balance of a reverse mortgage loan that must be repaid upon your death.

Capital Gains

The current federal home sale gain exclusion is up to $500,000.00 for joint filers and $250,000.00 for individuals. A highly appreciate property can easily exceed these levels. Money you pay for federal and state income taxes, plus the new Obomacare Medicare surcharge, is gone to you and your heirs forever.

Step-Up In Basis

When a person dies, Section 1014(a) of the Internal Revenue Code generally allows a step-up to FMV (fair market value) in federal income tax basis for appreciated assets, including residences. There may be no capital gain taxes due after the death of one or both spouses.

Cash In Hand Now

Older homeowners often do not have the monthly income required to take out a conventional home equity loan or line of credit when they need cash in hand. The reverse mortgage loan strategy can be a lifeline, costing only fees and interest. Even if leaving a solid estate for heirs is a factor, the savings may exceed paying income taxes on today’s capital gain.

The market is full of fraud and scammers, so make sure to do some research first and then consult your trusted financial adviser if a reverse mortgage loan sounds good to you.