LAND POOR NO MORE:THE REVERSE MORTGAGE

For most people, their greatest single asset is their home. For most people, their finest (economic) day is that on which they pay off their home mortgage. But sophisticated financial planners see the other side of the coin-- the mortgage is paid, the home is "free and clear, Willie, free and clear!"--but the owners are old, retired on fixed incomes, without resources for repairs or taxes. They must either sell and move, a wrenching dislocation; or worse, mortgage the house again, with no means to make the monthly payment.

A reverse mortgage, properly tailored to the needs of the homeowner, can solve the problem. Either the owner-borrower can take out a lump sum, or receive monthly payments. In either case, when the property is sold, whether by the owner or their estate, the sums advanced (plus interest accrued, of course) are repaid out of the sales proceeds.

The key here is loan-to-value ratio and the age of the borrower. The reverse mortgage is clearly designed for the older retiree. The younger the owner-borrower, the less equity can be taken out (or the smaller the monthly pay out) or distribution. For anyone under the age of 65, the economics of the transaction are, in almost all cases, disadvantageous.

Tax planning plays a role here. The borrowings are loan proceeds, therefore not taxable as income. Upon sale of a principal residence, under present law at least $250,000.00 of gain is not taxable. Thus, in most cases the payback upon sale can be sheltered from tax, avoiding income tax on money that has to be paid to the lender. Careful estate planning is needed, however, to make sure that estate taxes don't have to be paid on money that will be needed to pay back the lender. In this context, the reverse mortgage can be a useful tool when combined with a Qualified Personal Residence Trust. Of course, as the loan becomes due on the death of the owner-borrower, the inheritors of the home don't get to keep it (unless they can pay the lender in full).

For the owner-borrower, this novel form of financing may unlock equity without increasing current burdens. It pays to be cautious, however, and carefully compare the products available. Another recommendation is to retain legal counsel that is versed in this area of the law.