News & Events

Have You Considered A Reverse Mortgage?

March 16, 2010

It can do more than just fund medical expenses

The figurative bumps and bruises that most people have suffered during the difficult economic times of the past year or so have left many looking for sources of ready cash. If you’re among them, are age 62 or older and have paid off (or are able to pay off) your mortgage, have you considered a reverse mortgage?

Although you may associate these arrangements with someone looking to fund an influx of unexpected medical costs, they can do more than just that. Retirement and estate planning strategies could both receive a boost from a well-planned reverse mortgage. Naturally, there are risks to consider, too. Let’s look at the specifics.

An expanding market

A reverse mortgage is an arrangement under which a lender makes payments to you for your home’s equity, and the proceeds are generally tax free. The loan doesn’t come due until you sell the home (at which time you may be able to deduct the interest on your tax return) or die.

Generally, the lender can’t sell the home — you retain ownership. If your estate or your family doesn’t have the liquidity to pay off the reverse mortgage after your death, however, your estate might have to sell the home, and the estate would keep any proceeds in excess of what is owed to the bank.

The reverse mortgage market has been expanding over recent years. According to federal housing data, the number of federally insured reverse mortgages went from 43,082 in 2005 to 112,015 in 2008. To stay competitive, many bigger mortgage lenders and banks began offering products during this period, some lowering fees and allowing more substantial payouts. A number of lenders even offer so-called “Jumbo” reverse mortgages for more highly valued homes.

Additional loan backers joined in as well. Previously, Fannie Mae was the primary buyer of reverse mortgages. Several other banks, including Bank of America, are now players in the reverse mortgage market. The federal government has taken notice, too. The economic stimulus package passed in early 2009 saw Congress raising the reverse-mortgage loan limit to $625,500 through the end of 2009. The lending limit is scheduled to revert to $417,000 beginning in 2010, but Congress may extend the higher limit — perhaps even by the time you’re reading this. Check with your CPA for the latest information.

Many uses

For years, reverse mortgages were looked at as a last resort for those living in valuable homes but lacking cash. These arrangements often provided a way to fund medical expenses, hospital stays and even nursing home residencies. In light of the reverse mortgage surge, however, things are changing. Many higher-net-worth individuals are using these arrangements to supplement their retirement income, allowing them to take trips or buy recreational vehicles. Some are even taking out reverse mortgages to fund the purchase of a vacation home.

Estate planning potential

Don’t overlook the estate planning potential of this product. With a reverse mortgage, you could withdraw some equity from your home. You could then use the money to make annual exclusion gifts to your children or grandchildren, thereby reducing the value of your taxable estate. Under the annual exclusion, you can give up to $13,000 per year per recipient free of gift taxes ($26,000 if married filing jointly) without using up any of your lifetime gift tax exemption (or any of your estate tax exemption).

Or you could use the money to fund a 529 college savings plan. 529 plan contributions qualify for the annual exclusion, and a special break only for 529 plans allows you to make five years’ worth of annual exclusion gifts to a 529 plan in a single year.

Intriguing choices

Reverse mortgages offer a way individuals can boost their cash flow or implement estate planning strategies. But, there are downsides to these arrangements — including high closing costs and loan-servicing fees, not to mention using up some or all of your home’s equity. Be sure to get professional advice before making this move.

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