A different type of equity loan for today’s seniors

A Tax Tip Article from The Tax Institute at H&R Block

Today’s seniors
It’s been estimated that today $4 trillion of home equity resides in the houses of America’s senior citizens. And now, with the state of the economy and significantly reduced retirement accounts, many of these seniors age 62 or older who have substantial equity in their homes are now considering a reverse mortgage as a way to convert this equity to cash for needed living expenses and to help meet other financial needs in retirement. Under a reverse mortgage, the senior homeowner can receive cash as a lump sum, in monthly installments, as a line of credit, or a combination of the three.

What makes reverse mortgages different from other traditional mortgages is that no payments are made on the loan until the owner moves out of the home or passes away.  Interest on the loan accrues and is added to the balance of the loan.

Is a reverse mortgage right for you?
Reverse mortgages aren’t for everyone. First, the homeowner must have no existing mortgage on the house; the reverse mortgage must be the primary mortgage. Additionally, there are lots of fees associated with obtaining the loan and if the homeowner chooses a monthly payment plan, additional monthly fees will incur.

With a reverse mortgage, the owner must also agree to keep up homeowners’ insurance and property tax payments. The good news is that funds obtained through a reverse mortgage don’t affect Social Security or Medicare benefits, but the bad news is that SSI and Medicaid benefits can be lost because any unspent funds count as a resource.

Qualifications
In short, not every residence qualifies for a reverse mortgage. To qualify, a home must be a single family or a two-to-four unit property that the senior citizen owns and occupies. Also eligible are townhouses, detached homes, units in condominiums and some manufactured homes. Condominiums must, however, be FHA-approved though it is possible for individual condominium units to qualify under the FHA Spot Loan program.

The amount a qualified senior can borrow as a reverse mortgage depends on several factors: the homeowner’s age, the current interest rate, and the appraised value of the home or FHA mortgage limits for the area. As a general rule of thumb, the more valuable the home, the older the senior is, and the lower the interest, the more the senior can borrow.

If the individual dies, sells the home or no longer uses it as the primary residence, the individual or the individual’s estate will be required to repay the amount received from the reverse mortgage, plus any interest and other fees. Any remaining equity in the home belongs to the individual or his or her heirs. In a case where the proceeds are not enough to pay off the loan, the loan issuer absorbs the difference.

Still interested in a reverse mortgage?
For the homeowner’s protection, anyone who wishes to apply for a reverse mortgage must go through counseling with a HUD-approved counseling agency or national counseling agency. For more information on reverse mortgages, seniors can contact the Housing Counseling Clearinghouse at 1-800-569-4287 to obtain the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders in their area.

This Tax Tip Article is brought to you by The Tax Institute at H&R Block.

To view other helpful tax tip information, visit the H&R Block Community, Digits, at  www.digits.hrblock.com

As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Tip Article is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.