A reverse mortgage is not a financial solution for everyone, in fact, for most people, because there are specific rules that must be followed and very often the funds received are not ultimately worth the cost.
If however, a couple who owns their home outright, are over 62 years of age and at least one of the spouses will be able to live in the home for at least one year from the date of receiving the mortgage, it may make sense.
If a couple has few assets, and needs more income than they currently receive for on-going health or other expenses (for example, to pay for care in the home) or they need funds to pay off existing debt, reverse mortgages can be a solution in that they provide a portion of the equity in the home in the form of a monthly income, a lump sum or line of credit or a combination of all three. Often, the amount of the reverse mortgage is a far less than the actual value of the home.
A reverse mortgage is a loan, so it does not require that monthly payments be made to the lender, as with a traditional mortgage or home equity loan. . Depending on the type of plan chosen, the reverse mortgage becomes due with interest when the borrower moves, sells the home, reaches the end of a pre-selected loan period, or dies. Because reverse mortgages are considered loan advances and not income, the amount received is not taxable. Any interest (including original interest discount) accrued on a reverse mortgage is not deductible until the mortgage is actually pay it, which is usually when the loan is paid off in full.
Not infrequently, individuals who may have a beneficiary or other deed that gives the home to their children or others when they die do not realize that the beneficiary deed or designation is usually ineffective to transfer the home upon the owners’ death, because the home must be sold to re-pay the loan. If the home sells for more than the amount loaned, the additional proceeds may usually be retained by any named beneficiaries; if the home sells for less than the amount loaned, the lending company must accept the sale proceeds and cannot seek repayment for the full loan amount from any heirs, unless they do not sell the home or otherwise pay the full loan amount. Any beneficiaries of a home that has a reverse mortgage may choose to keep the home so long as they re-pay the full amount of the loan from other funds.
Debra K. Schuster, M.H.A., J.D.
Debra K. Schuster, P.C.
St. Louis, Missouri