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Is It Right to Reverse?

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Posted On: 10/12/2011

QUESTION:

I’m 65, my wife is 62, and we owe $130,000 on our home that’s worth somewhere between $375,000 and $400,000. Our retirement money will be about $2,500 take home a month when she retires in three years. Would a reverse mortgage make sense or should we just sell the home and pay cash for something?

ANSWER:

With an FHA-insured “saver” reverse mortgage you likely could refinance your home at a low cost, pay off your current mortgage and have cash in the bank. In this situation you would no longer have a monthly cost for principal or interest; however, you would continue to be responsible for property taxes and insurance. When you move, sell or pass away, the property would have to be sold or refinanced to repay the debt

Alternatively, you could sell the current home and move into a mortgage-free property, perhaps a smaller, more efficient home. You still would have to pay taxes (and you should get insurance coverage) but there would be no other debt against the property.

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Another idea is to rent the current property and move elsewhere. This puts you in the real estate business, but if rent covers the costs of ownership it can be worthwhile. Be aware that vacancies and repairs can represent major costs, depreciation can lower taxes and that if you rent for more than three years you will lose the ability to sell a prime residence and shelter as much as $500,000 in profits if married, $250,000 if single or you file separately. See a tax professional for details.

If you have adult children would they be willing to provide a monthly subsidy? You could then stay in the property and they would inherit it upon your passing. Why not speak with them to see if they have any resources that could help in your situation. Speak to an attorney for specifics.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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