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Maybe You Don’t Need a Reverse Mortgage

MoneyWise

Christian talk radio with Rob West

August 17, 2022

For all the hoopla about reverse mortgages these days, it’s surprising that only about 2-percent of folks eligible for them take one out. Maybe the 98% know something the others don’t, not just that reverse mortgages have high fees and lots of rules, but that there are alternatives. We’ll talk about them today on MoneyWise. The idea of getting a lump sum payment or a nice monthly check from a reverse mortgage company could be a big help to someone who has all or most of their house paid off but still struggles with day to day expenses. It could seem like a real lifesaver. THERE'S NO FREE LUNCH To get that money, you’re giving up equity in your home, and that might be a concern for a lot of seniors who’d like to leave something to their heirs not a mortgage company. So what sounds good doesn’t always work out that way. Reverse mortgages typically have higher interest rates and other costs and fees attached to them. You also pay the usual closing costs that you would for any mortgage an appraisal, loan recording, credit check, and title insurance. But then you’ll also have to pay a mandatory counseling fee, a 2% mortgage insurance fee upfront, and then an annual mortgage insurance fee plus a monthly loan servicing fee of up to $30 if your interest rate adjusts monthly. But there’s an even bigger thing you have to watch for with reverse mortgages, and that’s the company trying to sell you on one through TV ads and mailings. You have to know who you’re dealing with. As I said, the pitch may sound good, but reverse mortgage companies haven’t always lived up to their promises. Some years back, the Consumer Financial Protection Bureau fined three of these companies for deceptive advertising. No wonder Consumer Reports says you should consider a reverse mortgage only if there’s no other way to stay in your home and pay your bills. And you should only reach that decision after exhausting all the alternatives. FOUR ALTERNATIVES TO CONSIDER: First sell your home and buy something smaller leaving you with the difference in cash. This can be difficult from an emotional standpoint because a home you’ve lived in and raised your children in can hold a lot of memories. If you can overcome the emotional attachment, not only will downsizing give you the cash you need, but the reduced expenses may just be what you need to balance your budget. This next alternative, if you haven’t entirely paid off the home yet, is to consider refinancing the balance you owe. Interest rates have been climbing, but they may still be low enough that you could reduce your monthly payment and free up cash. If you go that route, you want to avoid, if at all possible, extending the term of the loan. If you have 10 years left on your current mortgage you want to refinance with a new, lower interest 10-year mortgage. And you really want the new interest rate to be at least 1 point lower than the old rate. The next alternative to a reverse mortgage is a little outside the box, but how about selling the home to a family member perhaps children who would be heirs anyway when you go home to the Lord? If you sell the property to a family member you get cash out and then you can lease it back and remain living there. The family member or members could then take advantage of certain tax deductions for landlords. Now, the last alternative is something of a variation of selling to a family member. Just as before, that person buys the house from you, but with what might be called an inter-family mortgage. In other words, you owner-finance the purchase. The family member makes the monthly mortgage payment to you instead of a bank giving you cash to meet your expenses. There’s another advantage to owner-financing the sale of your home to a family member or anyone else. You would reduce the amount you could potentially owe in capital gains taxes. If the outright sale of the home would generate a profit of more than $250, 000 for an individual or $500, 000 for a couple filing jointly, then spreading out those payments over a number of years could reduce the amount of capital gains you’d have to pay in any given year. That part can get pretty complicated, so it’s best to consult with an estate or tax attorney on how to do this so you pay the least amount in taxes. Any of these alternatives are worth investigating if you’re struggling with day-to-day expenses but you don’t want to sign your home over to a reverse mortgage company. On today’s program, Rob also answers listener questions: ● What are the rules surrounding contributions to IRAs? ● Is putting a family member on your credit card account as an authorized user the same as co-signing? ● Does it make more sense to pay for a new roof out of savings or finance the replacement? ● Is there a good resource to learn church financial management? RESOURCES MENTIONED: ● ECFA. org

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