The answer to the common reverse mortgage tax question

Posted on February 16, 2013 by sidac

As people are preparing their taxes, I’ve been receiving the question, “Is the interest on my reverse mortgage deductible?” So let me answer this question for you.

For interest to be a tax deduction for individual taxpayers, it must first be paid. Being one is not making payments on their reverse mortgage, the interest is not being paid but accruing on the loan along with the FHA Mortgage Insurance Premiums (MIP) and servicing fees (applicable on some reverse mortgages). Therefore the interest is not a tax deduction until it’s actually paid.

For FHA Mortgage Insurance Premiums IRS states, “You can treat amounts you paid during 2012 for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.” However, as with the interest on a reverse mortgage, the MIP amount must first be paid.

There is a way to receive the tax deduction during the term of the reverse mortgage loan. While payments are not required with the reverse mortgage, borrowers may choose to make payments. There are no penalties for making these pre-payments and the borrower has the option on when and how much they may choose to pay.

Payments reduce the Unpaid Principal Loan Balance. The loan balance is made up of the following categories: MIP, Servicing fee, interest, and principal amount (sum of amount borrowers obtain for their use, i.e. paying off previous loans and liens, other closing fees, and other personal uses). When borrowers make payments to reduce the loan balance they are first applied to the MIP, then the servicing fees, then the interest followed by the principal balance.

Once the borrower has paid enough to cover the accrued MIP, service fees, then additional payment amounts are applied to the interest on the loan. When interest paid in a calendar year exceeds $600 the lender will send you a 1098 int tax form for the amount of interest paid.

Since the payments have to cover the initial MIP of 2% of the Maximum Claim Amount, then the on-going MIP that has accrued along with any servicing fees before they are applied to the interest, most borrowers don’t find it feasible to take the deduction. The loss of a tax deduction may be considered a negative of the reverse mortgage for some people but the pros and cons need to be weighed.

Making pre-payments on one’s reverse mortgage may still be beneficial in reducing the Principal Loan Balance. And if one has an adjustable rate, having access to the funds in the future.

If one has the adjustable rate HECM the full payment amount can:

be applied to create or increase the line of credit in which these payments can be borrowed in the future;
or applied to their monthly payment to increase the amount they receive monthly or the length time they receive the monthly payments.
If not specified, the payment amount will be applied to or create a line of credit.

If one has a fixed rate reverse mortgage the payment reduces your loan balance as outlined above but the funds do not become available to re-borrow in the future.

Keep in mind that payment in full will terminate the loan and eliminate any available term/tenure payments and/or line of credit.

When the loan is paid in full the interest will have been paid and could become a deduction at that time to the borrower or their estate.

Most seniors who do a reverse mortgage do not have a significant income tax burden therefore a tax deduction is not a large concern for them. Many borrowers feel that receiving funds for one’s needs and desires with no required monthly mortgage payments outweigh the loss of the tax deduction. They want to live comfortably, have some “elbow room,” and be independent with security, independence, dignity and control.

I am a reverse mortgage expert, not a tax expert or advisor. Check with your tax advisor or IRS regarding tax deductions for your individual situation.

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-Dk

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Reverse Mortgage Protects Retirement Plan

Posted on February 10, 2013 by sidac

Have you seen the sign, “Too much month at the end of the money?” That applied to Pat and Mary’s situation. In their mid 70’s, Pat and Mary planned for their retirement and have a good plan in place. But as their life changed they found there wasn’t enough money to last through the end of the month. Creating the needed additional funds for each month from their retirement plan would impact their resources for their future. Therefore their financial planner suggested they look into using their home equity and explore a reverse mortgage.

A mortgage just like any other mortgage, the reverse mortgage offers special terms for senior home owners 62 and older. With the FHA insured reverse mortgage, Home Equity Conversion Mortgage (HECM), the most popular and only one available in Minnesota, there are no income or credit score requirements to impact the interest rate and no monthly mortgage payment requirements. *(See note below about Financial Assessment.)

The funds available can be received in a lump sum, monthly payments, a line of credit, or a combination of these. The monthly payments can be structured as tenure payments (as long as you occupy home as primary residence) or as one needs as long as the home is the primary residence of at least one of the borrowers. Funds in the line of credit grow so more funds can be available in the future.

The loan is due and payable when the home is no longer the primary residence of the borrower(s) such as they move, sell or die, or on their 150th birthday. As a non-recourse loan, if the loan balance is higher than what the home can be sold for, the borrower(s) or their estate don’t have to pay with the difference, the FHA Mortgage Insurance Premium (MIP) covers the difference. And if the home is sold for more than the loan balance, the borrower(s) or their estate receive the difference.

After being educated about the reverse mortgage including the positives and negatives, rather than using their retirement funds so they could be protected for their future needs, Pat and Mary decided to do a reverse mortgage.

Doing the Standard Adjustable Rate HECM, they set up the proceeds available to receive a portion in monthly payments, with the balance in a line of credit that they can use if and when they need it.

Receiving the monthly payments allows them to live comfortably, meeting their living expenses without running out of funds before the end of each month.

The line of credit grows at the rate on the reverse mortgage plus 1.25, i.e. if the rate is 2.5% the growth rate will be 3.75%. If the interest rate goes up, the growth rate does also. This means that more funds will be available in their unused portion of their line of credit. They can use these funds for an emergency such as car repairs, a new furnace, medical expenses or for other needs and desires such as making a trip for a family reunion or out of town wedding.

With the reverse mortgage in place providing monthly cash flow and a line of credit for other needs, Pat and Mary’s retirement funds can be protected for their future. They are living their retirement years with a good plan along with funds for their current needs. Now they have more money at the end of the month – what a way to live in retirement!

*As of April 27, 2015 income and credit are used for the Financial Assessment to determine borrower’s ability and willingness to pay property taxes and insurance into the future

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Let Me Educate You On Adjustable Rate Reverse Mortgages

Posted on February 2, 2013 by sidac

With the April 1st elimination of the FHA Home Equity Conversion Mortgage (HECM) Standard Fixed Rate, the Adjustable Rate will once again be the most common choice of reverse mortgage borrowers. While adjustable rates mortgages have gotten a bad rap they should be understood and considered with reverse mortgages. Let me educate you.

A mortgage just like any other mortgage, the reverse mortgage offers special terms for senior home owners 62 and older. Advantages for seniors, are with the reverse mortgage there are no income or credit score requirements to impact the interest rate and no monthly mortgage payment requirements. The non-recourse loan is due and payable when the home is no longer the primary residence of the borrower(s) or on their 150th birthday.

To understand the programs and interest rate options, first you need to know how the loan amount is determined. With the reverse mortgage the Principal Limit or maximum loan amount at the time of origination is determined by the home appraised value or FHA’s Lending Limit ($625,500 through 2013), the age of the borrower (the older one is the more they can receive), and the Expected Interest Rate of the program chosen. The Expected Interest Rate is only used to determine the loan amount it is not necessarily the same as the interest rate on the loan.

The funds available can be received in a lump sum, monthly payments, a line of credit, or a combination of these. The monthly payments can be structured as one needs or as tenure payments (for life) as long as the home is the primary residence of at least one of the borrowers. Funds in the line of credit grow so more funds can be available in the future.

Prior to 2008 the only reverse mortgage option was an adjustable rate. In 2008 HUD introduced the HECM Fixed Rate. And in October 2010 the HECM Saver was introduced which reduces the up-front Mortgage Insurance Premium (MIP) but also has a lower Principal Limit or loan amount; generally the HECM Saver has a higher interest rate as well. The HECM Saver is available as an adjustable rate option and a fixed rate option. The programs that have the full up-front 2% FHA MIP are called Standard, and are available in the adjustable and fixed rate programs (through April 1, 2013 when the Fixed Standard will be eliminated).

The Fixed rate is often a favorite option however with the reverse mortgage it requires that all the funds be drawn in a lump sum at closing which isn’t the best option for everyone’s situation.

The bad rap on adjustable rates occurred with conventional mortgages because when the interest went higher so did the monthly mortgage payments. And this impacted many who couldn’t afford the higher monthly mortgage payments. Let’s look at why the reverse mortgage is different and should be considered as a viable option for senior homeowners.

Because monthly mortgage payments are not required with the reverse mortgage, having the rate change doesn’t impact one’s monthly payment and/or cash flow.
The Adjustable Interest Rate is the option that offers receiving funds as monthly payments, a line of credit, lump sum or a combination of these.
Having more flexibility with how the funds are drawn is beneficial to borrowers. If you don’t have a need for all the funds up-front then leaving them in a line of credit, which has a growth rate, or structuring monthly payments to your needs are more favorable options.
- The growth rate on the unused portion in the line of credit is determined by the current interest rate on the loan plus 1.25. For example if the current rate is 2.5%, the growth rate will be 3.75%. If/when the interest on the loan increases so does the growth rate on the line of credit, meaning even more funds become available to the borrower over time.
Because it is a loan against the property, not considered income, if one is receiving or will receive Medicaid (Medical Assistance in Minnesota) in the future, the adjustable rate is also more favorable, allowing you to draw funds as needed rather than as a lump sum which could impact receiving Medicaid.
Taking funds as periodic payments means interest and the on-going MIP is accruing on the loan balance at a slower pace vs taking funds as a lump sum, especially when there isn’t a need or better use for lump sum funds.
Monthly mortgage payments are not required however you have the option of making payments. When the payment is made it reduces the loan balance and with the adjustable rate it is applied to the line of credit and available for future draws.
The adjustable rate is low right now, and yes, it can adjust and be higher in the future, however it only impacts the amount due when the loan is due and payable. And there is a cap of 10 points higher than the initial interest rate at closing. For example, if the interest rate at closing is 2.5%, the cap is 12.5%.
What we don’t know is when the rates will increase or how high they will increase but with the lower rates now, even if the rates do increase substantially the interest expense over the life of the loan will be tempered by the current low interest rates.
And even if the reverse mortgage interest rate does go up, as a non-recourse loan when the loan is due and payable if the loan balance is higher than the home can be sold for, the borrower or the estate will not need to come up with the difference. If the home can be sold for more than the loan balance due, the equity goes to the borrower or their estate.

With an understanding you can see why the reverse mortgage, even with an adjustable rate, can be favorable to senior homeowners.

The HECM Saver is available in the adjustable rate and will remain an option with the fixed rate. So if you really want a fixed rate you will still have the option, just remember less funds will be available and the interest rate is likely to be higher.

When considering a reverse mortgage review all the options, Adjustable Standard, Adjustable Saver or Fixed Saver, and decide which is best for your situation.

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Reverse Mortgage Features and Terms Summary

Posted on January 25, 2013 by sidac

There are many loan documents with the reverse mortgage (all mortgages actually) and it’s hard to remember all the details through the life of the loan. To help you have a better understanding initially as well as be a reference in the future, this article summarizes the reverse mortgage features and terms.

A reverse mortgage is a mortgage or lien against your property allowing you to use the equity in your home.
Monthly mortgage payments are not required however you are responsible for property taxes and hazard insurance.
Through FHA, the Home Equity Conversion Mortgage (HECM) is a FHA insured program and regulated by HUD.
As a loan against your property, the funds are not considered income so Social Security and Medicare are not affected; and generally SSI and other public benefits are not affected; Medicaid can also be received under certain situations – consult with legal services for your situation.
Generally the funds received are considered tax free – consult your tax advisor regarding your situation.

Who Owns Your Home

You retain title and remain a vested owner of your property.
You retain all rights and responsibilities of home ownership, including property maintenance, tax and insurance payments, etc.

Borrower Protection

Should the lender default, FHA will assume the responsibilities of the lender and guarantees funds are available to borrowers according to terms of the loan.
As FHA loan, interest rates are lower than they otherwise would be on a reverse mortgage.
Non-recourse: Borrower/Homeowner or the estate will never be obligated for more than the fair market value of the property.

Adjustable Interest Rate – HECMs

- If you have selected an adjustable rate product, your interest rate may change over the life of the loan.
- There is a lifetime cap on the rate; for the monthly adjustable rate it is 5 or10 points (depending on the lender) and for the annual rate it is 5 points over the initial rate at the time of closing.
- The interest rate may adjust annually (maximum of 2 points with each annual change) or monthly. The current and future rates will be provided on your monthly statement.
- The rate is based on the LIBOR index.

Interest is charged against your loan balance only. Unused line of credit and/or unused term/tenure payments will not accrue interest.

Fixed Interest – HECMs

If you have selected a fixed rate product, your interest rate is fixed and will not change over the life of the loan.

Ongoing Costs

Interest accrues only on amounts borrowed.
Monthly charge for FHA Mortgage Insurance Premium (MIP) – .5% (1.25% on loans closed prior to 10/2/2017) per year on loan balance (added to loan balance).
All costs, charges, and accrued interest are added to loan balance.
Essentially you are borrowing these funds each month because you are not paying them monthly; this is why the loan balance increases over time.

Line of Credit (if applicable)

Available credit of unused portion of line of credit grows over time at the current applied interest rate plus .5% (1.25% on loans closed prior to 10/2/2017). This is not interest, but a growth rate.
Interest is not charged on unused portion of line of credit.
Line of credit funds advances must be requested in writing from the lender/servicer. Lender has 5 business days to process your request.

Term/Tenure Payments (if applicable)

If you have selected monthly Term or Tenure Payments, these monthly advances will be paid to you on the first business day of each month beginning the month after loan closing.
Interest is not charged on un-advanced monthly term/tenure funds.

Prepayment

Although monthly or periodic mortgage payments are not required, you may make full or partial payments at any time.
Please contact the lender/servicer for payment address and information.
Partial payments reduce the loan balance due.
Partial payments on adjustable rate HECM’s will create or increase the line of credit and these payments can be borrowed in the future.
Payments on fixed rate HECM’s are permanent payments.
Payment in full will terminate the loan and eliminate any available term/tenure payments and/or line of credit.

Due and Payable

No payment is required until/unless one of the following occurs:
- Borrower(s) no longer occupy the home as a primary residence.
- Borrower(s) no longer owns the home.
- All borrowers have passed away.
- Property taxes are not kept current.
- Homeowner’s/Hazard insurance is not kept current.
- Flood Insurance (if applicable) is not kept current.
- HOA dues (if applicable) are not kept current.
- Required repairs are not completed.
- Property is not properly maintained.
- Title vesting changes are made.

Upon Death of Borrower(s)

If there is a surviving borrower(s) continuing to occupy the home, the reverse mortgage continues without any changes. If a sole borrower dies or there are no surviving borrowers or a non-borrowing spouse, the reverse mortgage becomes due and payable in full. (Non-borrowing spouses see HUD Mortgagee Letter 2015-15 and check with the servicer regarding their rights)
Heirs/estate should contact the lender/servicer within 30 days to provide notice of the death.
A reverse mortgage is not transferrable to the heirs or estate.
The loan may be repaid from sale of property.
If heirs wish to keep the home, they may satisfy the debt by paying the lesser of the mortgage balance or 95% of the FHA appraised value of the home at that time.
Most lenders are allowing up to six months for heirs to settle the estate and repay the reverse mortgage (but timely communication with the servicer is required). Where justified, HUD, who regulates the HECM, may approve extensions beyond this time up to a total of 12 months.

Your Responsibilities

Pay property taxes.
Maintain homeowners insurance on property.
Maintain flood insurance (if applicable) on property.
Pay HOA dues (if applicable).
Complete required repairs timely.
Maintain property.
Not make changes to title vesting.
Return the annual occupancy certificate to lender.
Provide proof your property taxes have been paid annually.
Provide proof your property insurance has been paid.

When To Notify Your Lender

If you change your insurance provider.
If you change your bank for direct deposits.
If you are putting the property into a Trust.
Any other changes to the property.
If there is a claim from your property insurance.
When a Power of Attorney (POA) is being implemented to make decisions on your behalf.

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-Cr

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

“Own Your Future Minnesota” Campaign Launched – How are you personally preparing for your long-term care needs?

Posted on October 2, 2012 by sidac

The Own Your Future Minnesota campaign is part of a national educational campaign of the U.S. Department of Health and Human Services that promotes personal preparation for long-term care. The campaign is to bring awareness as well as urge Minnesotans of the need to plan for their later years when they are likely to need long-term care.

Own Your Future is important to Minnesota! Between 2010 and 2030 Minnesotans over age 65 will grow by 107%. Those over 65 have a 70% chance of needing long-term care. In 2030 over 325,000 elderly would need to be served if Medicaid (Medical Assistance) had to serve all with insufficient income. This could cost $5 Billion by 2030. Because of the enormous growth in the aging population and the number without resources, Medicaid will be strained to provide support for all these individuals.

Own Your Future Minnesota is encouraging people to have discussions, and be aware of options to pay for their long-term care including considering personal savings, long-term care insurance, life insurance options, annuities, and using ones home equity including reverse mortgages. Additionally they are encouraging people to discuss and plan their advance care which refers to their legal documents.

With the October 2nd launch, Governor Mark Dayton and Lieutenant Governor Yvonne Prettner Solon are urging all Minnesotans age 40 to 65 to own their future by mailing a letter to them.

“Planning for long-term care helps to ensure choice, control and peace of mind for the individual,” said Lt. Gov. Yvonne Prettner Solon. “The sense of security and comfort that comes with having a plan is something all Minnesotans should enjoy.”

The first phase of Minnesota’s Own Your Future initiative includes a new website, public service announcements, internet advertising, community meetings and other employer and grassroots organizations. The website offers options for planning at various ages, tools for your planning covering your personal, financial, housing and advance care planning, as well individual’s stories.

Future phases of Own Your Future will look at development of affordable financial products to help people pay for long-term care and evaluation of possible changes to Medicaid to better align with and encourage private payment for long-term care.

As a member of the Advisory Panel, and on the speakers bureau, through the coming year I will be doing presentations around the Twin Cities to bring clarity on what is long-term care, the impact it has on individuals and their families, why plan ahead along with options and resources to consider.

I’m proud and excited to be part of this important state initiative as the reverse mortgage industry representative.

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Minnesota Reverse Mortgages SIDAC

Minnesota Reverse Mortgage Information, Facts and News from the Experts Excelling in Service

Category Archives: Long-term care planning

The answer to the common reverse mortgage tax question

Reverse Mortgage Protects Retirement Plan

Let Me Educate You On Adjustable Rate Reverse Mortgages

Reverse Mortgage Features and Terms Summary