Some Options for Older Homeowners

SOMETIMES OLDER people are well off from the standpoint of the equity they've built up in their home, but may be strapped financially because of limited funds actually available to meet day to day expenses. If you're in this position, the law provides a number of attractive alternatives.

Reverse Mortgages. A reverse mortgage lets you borrow against the equity in your home, without having to repay the loan right away. You can get money in a lump sum, in monthly cash payments for life, or by drawing on a line of credit, or you can choose a combination of these options (i.e., monthly payments plus a line of credit for emergencies).

Reverse mortgages are very complex, and involve difficult financial, legal and personal decisions. Examine them carefully, talk to a lawyer who is familiar with the issues, and discuss your aims and concerns with your family. Reverse mortgages may also have an effect on estate planning and estate taxes. Be sure to consult your lawyer to make sure the arrangements you make are in your best interest.

How They Work. The amount you can borrow, and the size of the loan installments are based on several factors, including:

• your age,
• the value of the home and of the equity you hold,
• the interest rate and kind of loan you select.

These loans can be costly, but the relative costs lessen over time, and you will never owe more

than the value of your home.

Most reverse mortgages have no restrictions on how you use the money. The loan usually does not have to be repaid until you sell, die or move from your home, although some loans must be repaid at the end of a specified number of years. Some lenders combine a reverse mortgage with an annuity that allows you to receive loan payments under the annuity even after you sell your home and move.

When you sell your home or move, or at the end of the term, you must repay the money you have borrowed plus the accrued interest and fees. The house can be sold to repay the loan, or the funds collected some other way. The lender is not permitted to collect more than the appraised value of the house at the time the loan is repaid, even if the loan exceeds that amount.

Federal law requires all reverse mortgage lenders to inform you, before making the loan, of the total amount you will owe through the course of the loan. This enables you to compare the costs.

THE LAW GIVES YOU MANY WAYS TO SAVE YOUR HOME

Eligibility. Eligibility depends on the individual product, but most require the borrower and every other person whose name is on the deed to:

• be at least sixty-two; and
• own the property free and clear, except for liens or mortgages that can be paid off with proceeds from the loan.

In addition, the property must be:

• the borrower's primary residence (that is, not a vacation home)
• a single-family residence.

Tax Consequences. Are reverse mortgage payments taxed? So far, the IRS has not taxed reverse

mortgage payments, on the grounds that the money is a loan. However, a portion of reverse annuity payments will be taxed.

Is the interest deductible? The general rule is that interest cannot be deducted until it is actually paid. Since you do not pay the interest on a reverse mortgage until the loan comes due, it most likely will not be deductible until that time.

Estate planning considerations. Reverse mortgages allow you to spend your home equity while you are alive. You may end up using all of your equity, and not have any left to pass down to your heirs. Some plans allow you to set aside some of the equity, so that it is not used.

Selling Without Moving. You can also put your home equity to practical use with sale-leaseback, life estates and charitable annuities. Each of these options has significant consequences and should be used only with legal guidance.

Sale-leaseback's. In a sale leaseback , you sell your home, but retain the right to live there paying rent. The buyer usually makes a substantial down payment to you. You act as a lender by giving the buyer a mortgage. You get the buyer's mortgage payments: the buyer gets your rent payments. You remain in the home and can use the down payment and the mortgage payments as income. The buyer can deduct the mortgage interest payment form his or her income, and will also benefit if the value of the property increases.

However, the IRS requires that both the sale price and the rental payments be fair market rate. Sale-leaseback used to be good investments, especially for adult children, but today there are fewer tax advantages so finding an investor may be difficult.

Life estates. In a life estate, or sale of a remainder interest plan, you sell your home but retain the right to live there during your lifetime. The buyer pays you a lump sum, or monthly payments, or both. You are usually responsible for taxes and repairs while you live in the house. At your death, full ownership passes automatically to the buyer. This arrangement is used most commonly within families, as part of an estate plan. As with a sale-leaseback, it might be difficult to find an outside investor.

Charitable remainder trusts. In a charitable remainder trust, you donate your home to a charitable institution, in return for a lifetime annuity and possibly a tax deduction. You retain a life estate, and you remain responsible for taxes and maintenance. When you die, your home becomes the property of the charitable institution.