Rules on Reverse Mortgages
Federal Housing Administration (FHA) has
imposed more stringent requirements on
reverse mortgages, making them increasingly
difficult to obtain. For qualified borrowers,
though, continued low rates and the spread
of so-called "purchase loans"
can make it worthwhile to consider this
type of debt.
instead of outflow
As the name suggests, a reverse mortgage
is the opposite of a traditional home
loan. With a reverse mortgage, you get
cash instead of making payments to the
lender. You can get a lump sum, a line
of credit, or regular monthly income.
The amount you borrow will be secured
by your home, so reverse mortgages are
for homeowners with little or no debt
on their home. Most reverse mortgages
are Home Equity Conversion Mortgages (HECMs),
which are offered by private lenders and
insured by the FHA; borrowers must be
at least age 62.
amount you'll receive will be determined
by current interest rates, your age, and
your home equity. Interest rates are relatively
low now (around 5% for a fixed-rate loan
and under 3% for a loan with a variable
rate that adjusts monthly), but you'll
pay an added 1.25% of the balance for
mortgage insurance. The older you are
and the greater your home equity, the
more you'll be able to borrow on a reverse
reverse mortgage calculators can be found
online. Near midyear 2014, the calculator
at reversemortgage.org was asked what
a married couple in Indianapolis, both
aged 68, could borrow against a $320,000
debt-free home. A fixed-rate loan would
permit an upfront payout of over $97,000,
whereas a variable-rate loan would provide
$971 in monthly cash flow. If that couple
were both age 78, the numbers would be
about $106,000 upfront and $1,236 a month,
respectively. In any case, no tax would
be due on the borrowed funds. (See the
Trusted Advice column "Delayed Deduction"
for more information.)
a HECM, an owner occupant doesn't have
to make any debt repayment while still
living in the home. No matter how large
the loan balance becomes, the outstanding
loan balance won't be due until the borrower
dies, sells the home, or is no longer
using the home as a primary residence.
Naturally, the loan balance will keep
mounting: that $97,000 or $106,000 loan
against a $320,000 house will approximately
double in 11 years, at today's fixed interest
A reverse mortgage borrower still owns
the home, which means continuing to have
Example 1: Frank and Robin Grant
receive a reverse mortgage that will pay
them $1,000 a month. They still own their
home, so they still must pay homeowners
insurance premiums, local property taxes,
and association dues.
new FHA rules, reverse mortgage applicants
must undergo a financial assessment in
order to qualify for a loan. Lenders have
to check to see that borrowers can afford
to pay the required taxes and insurance
bills, based on their assets and cash
flow. Borrowers with questionable resources
may be asked to put money into escrow
or may have their application rejected.
Reverse mortgages are aimed at seniors
who wish to stay in their home as they
grow older. In effect, they can use their
home equity for added cash in retirement
so they won't have to move into an unfamiliar
place, perhaps one that's away from friends
not the case for all seniors. Some want
to buy a different home that's easier
to maintain or move to a less expensive
2: Helen Parker is a widow living
in a large house. She wants to buy a place
in a seniors' community, but she lacks
the income to qualify for a traditional
mortgage, and she is having a difficult
time selling the house where she now lives.
Helen has enough assets to qualify for
a reverse mortgage purchase loan, which
will enable her to buy into the seniors'
community now. Helen still plans to sell
her old home, but she can move right away
and not have to make payments on the reverse
mortgage purchase loan.
mortgages can be complicated, and they
require various fees, but they may offer
a practical way to tap home equity in
reverse mortgages are considered
loan advances and not income, the
amount you receive is not taxable.
interest accrued on a reverse mortgage
is not deductible until the interest
is actually paid, which is usually
when the loan is paid off in full.
Such a payment might be made by
the borrower, by an heir, or by
the borrower's estate.
the party repaying the loan, the
deduction may be limited because
a reverse mortgage loan generally
is subject to the limit on home
equity debt. That limit caps deductions
to the interest on $100,000 of debt.
Source: August 2014 AICPA Client Bulletin