WSJ: Time for Reverse Mortgages is Now

With some uncertainties on the horizon for reverse mortgages, there are several alternative ways that families can set up a reverse mortgage-style agreement that still allow retirees to tap into their home equity, a Wall Street Journal article reported this weekend. The article suggests that as an alternative to a FHA-backed HECM loan, families with well-off adult children could set up their own private reverse mortgages for their parents, or could buy their parents’ homes outright and help fund retirement that way.

Further, the article suggests, the best time to do a reverse mortgage may be right now.

“Families with well-off adult children have tended to avoid reverse mortgages, in part due to the costs,” the article states. “The upfront fees can total as much as 5% of a home’s value. As part of the upfront costs, borrowers are required to pay a mortgage-insurance premium ranging from 0.1% for loans with a lower equity payout to 2% for those with a higher payout.”

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A limited partnership can be used in the case where several children are involved and the amount owed on the house is considerably more than the house is worth, writes WSJ. In that situation, the children could benefit from a “stepped-up basis,” meaning they will not owe capital gains tax on the property when they sell it.

A second option noted in the article is a revolving line of credit set up by an adult child that is backed by the home equity.

The article notes several risks, however, including diminishing property values and the inability for a child funding the reverse mortgage to keep up with payments. Further, the article notes, with loan limits set to expire in October of this year, housing counseling funding as an unknown, and the potential for an increased assessment of a borrowers ability to pay taxes and insurance on the loans, reverse mortgages are facing several future uncertainties.

The bottom line, National Council on Aging Vice President for Home-Equity Initiatives Barb Stucki tells WSJ, is that the timing may be best now. 
For traditional reverse mortgages, “The good advice is to do it this summer,” she said.

Read the Wall Street Journal article.

Written by Elizabeth Ecker

 

 

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  • While family reverse mortgages (“FRM”) have their place, they also have the potential to destroy long-term family relationships.  Planning should be less about dollars and cents and more focused on preserving what the family values most.

    In most cases HECMs should be preferred to FRMs.

  • Most of the Planners I work with have a hard enough time understanding the traditional HECM…I bet the planners who can execute this type of family loan are probably already doing so…

  • Most of the Planners I work with have a hard enough time understanding the traditional HECM…I bet the planners who can execute this type of family loan are probably already doing so…

  • Wanting to a nice guy, my prior comment was less than fully candid.  A night’s sleep gives one a different perspective.
     
    For example, the following paragraph makes absolutely no sense:  “A limited partnership can be used in the case where several children are involved and the amount owed on the house is considerably more than the house is worth, writes WSJ. In that situation, the children could benefit from a ‘stepped-up basis,’ meaning they will not owe capital gains tax on the property when they sell it.”

    If that paragraph is actually what was said in full, the purveryor has little idea what they are talking about.  A limited partnership does not insulate partners from taxation.  If the sales price is greater than its adjusted basis, gain will result.  Any debt forgiven at time of sale is taxable but if the note is recourse, exclusions may apply or if nonrecourse, the sales price will be increased by the debt forgiven.

    If the purveyor of the statement has a specific tax ruling justifying the paragraph based solely on the facts presented, that person should have cited it.  This is a very irresponsible article discussing some highly technical concepts.

    The article is poorly written and ill conceived.  The planning ideas are suspect and the rationales are flawed.  The WSJ can and should do better.  This article looks like it was written for one of the rag sheets rather than a responsible business journal.  Two thumbs down!!

  • Wanting to a nice guy, my prior comment was less than fully candid.  A night’s sleep gives one a different perspective.
     
    For example, the following paragraph makes absolutely no sense:  “A limited partnership can be used in the case where several children are involved and the amount owed on the house is considerably more than the house is worth, writes WSJ. In that situation, the children could benefit from a ‘stepped-up basis,’ meaning they will not owe capital gains tax on the property when they sell it.”

    If that paragraph is actually what was said in full, the purveryor has little idea what they are talking about.  A limited partnership does not insulate partners from taxation.  If the sales price is greater than its adjusted basis, gain will result.  Any debt forgiven at time of sale is taxable but if the note is recourse, exclusions may apply or if nonrecourse, the sales price will be increased by the debt forgiven.

    If the purveyor of the statement has a specific tax ruling justifying the paragraph based solely on the facts presented, that person should have cited it.  This is a very irresponsible article discussing some highly technical concepts.

    The article is poorly written and ill conceived.  The planning ideas are suspect and the rationales are flawed.  The WSJ can and should do better.  This article looks like it was written for one of the rag sheets rather than a responsible business journal.  Two thumbs down!!

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