A reverse mortgage – despite many of the popular preconceived notions that exist about them – could end up being a smart choice for a senior homeowner in a particular situation, particularly one who may be outside of the common stereotype of a senior who is “out of money” and requires a “last resort” loan. This is according to a new article published by Bloomberg.
“There seems to be an impression that taking out a reverse mortgage is an act of desperation by people who have no choice but to crack open and spend their nest egg of housing wealth,” writes Bloomberg Businessweek columnist Peter Coy. “That’s unfortunate because a reverse mortgage can be a smart choice for a wide range of people aged 62 and older, including ones who are far from desperate.”
This can include seniors who are “well set” for retirement, and who have much of their wealth in savings plans including 401K’s, the article says. By having the ability to extract cash from the house while still living in it, someone could raise cash more easily for big expenses including in-home healthcare or helping family members with education costs, the piece contends.
While loan proceeds are not subject to income tax since they are not technically income, there could be some tax ramifications relating to the sale of the home, the article says.
“The seller owes a capital gains tax on the difference between the sales price and the purchase price,” it reads. “The tax is owed to the IRS even if the borrower has to surrender most or all of the sales price to the bank to settle the loan. That’s true of any home sale, of course, but it tends to sneak up on reverse mortgage borrowers who haven’t planned well. One nice feature for heirs: If the borrower dies without ever leaving the home, there’s no capital gain tax due on the sale.”
Boston University economics professor Laurence Kotlikoff is an academic who has recently come to appreciate reverse mortgages, appearing in a recent webinar to explain his change of heart due to certain protections that they can afford the borrower, the article says.
“Kotlikoff told the audience that one feature he came to appreciate is the built-in protection against the decline in a home’s value,” the article reads. “The maximum amount that can be borrowed under a reverse mortgage rises every year at a pace that’s specified in the loan document. It’s not limited by the house’s actual market value, which might fall.”
“This is really great insurance against a decline in house value,” he told the audience, according to the article.
The article also tackles one of the most commonly-repeated misconceptions about reverse mortgages as it relates to the ownership of the home.
“In fact, the borrower retains title and can pay off the mortgage at any time if he or she chooses,” it reads. “When people do lose title to their homes it can be because of non-payment of property taxes. But that’s not unique to reverse mortgages.”
Read the article at Bloomberg.