My mother is 80 years old. She is running into difficulties financially as are many her age. The family is thinking about a reverse mortgage so she can buy a new car, pay her taxes, new roof etc. It would be nice to see her live out her years happily without financial troubles.
I am not exactly a beginner investor, but getting back into it after a few years. Question is: would’nt a reverse mortage be about the same as my purchasing the property and have my mother “lease” from me from the sale proceeds +interest?
Selling the property to you will create a taxable event for your mother. If she has a low cost basis in the home she could have a significant capital gain tax due. Alternatively going the reverse mortgage route your mother will have no capital gain tax and her heirs will inherit the home at a stepped-up basis thus mitigating the overall tax burden.
71 - The first $250k would be tax free if she’s lived in the house for 2 out of the past 5 years, which I’m assuming she has, so the taxes shouldn’t be a burden…
But from what I understand about a reverse mortgage, when she passes away the bank gets the property, so there is no house to be inherited by the remaining family members…I don’t understand what you mean by the “stepped up basis” for the heirs…
The bank does not “get the property” the loan only needs to be re-paid either from proceeds of the sale of the home or a family member pays it off from another source of funds. The reverse mortgage has a lot of advantages over you buying your mothers home and leasing it back to her.
You are absolutely right, I don’t know how I forgot about the $250k exemption. As mentioned by christopher the bank does not get the property. My understanding is that the heirs inherit the property just as normal but they have 12 months to payoff or refinance the reverse mortgage. Another interesting aspect, from what I’ve read, is that FHA guarantees that the loan payoff will not exceed the proceeds of the property sale. Thus you have downside protection should the home depreciate in value. You sell the house and payoff the bank, anything over and above the mortgage payoff goes to the heirs at the stepped up basis.
There are a lot of details that should be considered such as maximum LTV of the reverse mortgage vs the proceeds from a direct sale to you. These will be the funds that your mother has to support herself. I would lay everything out in a spreadsheet and do a cash flow analysis and see which scenario has the greater present value.
Thank you both very much. Very helpful. Can you explain what “stepped up” means. Also. I am not sure i undersand what you mean by the dowside protection in a reverse mortgage…if they give her a reverse mortage with LTV of 80%, $192,000.00 and it depreciates to a value of say $190,000.00 the bank eats the $2000.00. Is that right? the bank takes the risk of depreciation? Any good site to explain the reverse mortage better?
Yes, the bank eats the difference or technically I guess the FHA guarantee covers the bank’s loss. As for stepped up basis; your mother may have a cost basis in the property of say $50k but when the property passes to the heirs their basis is stepped up from $50k to the current market value. This saves the heirs from paying capital gains tax on the years of appreciation they did not own the property.
reverse mortgage has lots of closing costs and fees
be careful cause there are many diff. types and diff. lender programs and lots of con men are in this so called govt. mortgage business because it is so confusing to most people … including me !!!
A home eq. loan is prob. best with little or no closing costs.
the no payment deal on reverse mtg. only means the payments… meaming all the interest charges… are later subtracted from proceeds of any future sale