Tom Kelly: Taking an extra step to keep senior deferral in place
One common misconception of reverse mortgages is that prospective borrowers can qualify for an amount equal to the value of their home or at least the Federal Housing Administration loan limit.
The actual reverse mortgage amount is substantially less than both those numbers, ensuring there will likely be sufficient equity left in the home when the loan comes due.
This cushion between the value of the home and actual loan amount has become a hot topic, especially for seniors who have been deferring their property tax payments in housing markets that continue to go downhill.
For example, the Oregon legislature passed several changes to its property tax deferral program, including the elimination of any tax deferral if the homeowner has a reverse mortgage. The consensus was that since the deferred taxes were paid by the state until the home seller died or moved away, not enough money would be left over after the reverse mortgage was satisfied to pay those taxes.
Oregon never offered any known studies or estimated the number of homes where there would be a shortage because of a reverse mortgage and a tax deferral. The fear among senior advocate groups is that more states will follow in Oregon’s footsteps without waiting for concrete evidence that the property tax deferral-reverse mortgage combination will sting state coffers.
In Washington, the amount of equity in the home determines the amount of property taxes eligible for deferral. (For the deferral program, equity is the difference between the assessed value of the property and any debts secured by the property).
Washington homeowners must reapply every year for the deferral. Provided all qualifications are met (including adequate fire and casualty insurance), homeowners older than 60 with a household income of less than $40,000 may defer about 80% of their property taxes.
Deferred taxes are collected, plus 5% annual interest, when the primary owner moves out or sells the home.
Most reverse mortgage lenders work with the Washington State Department of Revenue in order to keep the deferral in place for seniors in need.
A reverse mortgage is a negative amortizing loan. That means as interest accrues and no payments are made, the amount owed is significantly greater than the original sum borrowed. The loans have enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title or take on a new monthly mortgage payment.
Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of money received is based on age, current interest rates and a current home appraisal. Money obtained from the reverse mortgage is tax-free and is not included in the annual household income under the deferral program.
A rough rule of thumb to estimate your maximum reverse mortgage loan amount is to use your age, minus five years, as the percentage you can take from your net equity depending upon how you take the distributions – lump sum, monthly draw, line of credit or combination of those.
For example, if you are a 75-year old person with a $500,000 home owned free and clear, the maximum reverse mortgage line of credit you could expect to receive would be $350,000 before closing costs (Seventy percent – 75 minus 5 years – of $500,000 is about $350,000).
Even if a slumping housing market has eroded the built-in cushion established by the reverse mortgage industry, most seniors with reverse mortgages have yet to sell. And, if they outlive the value of their home (draw out more funds than the house is worth), mortgage insurance makes up the difference.
Why eliminate, or curtail, any senior benefit until researched estimates are compiled – especially if we are at, or near, the bottom of a crazy, virus-slowed market?
It would make sense to first tie the program to an annual equity gauge before forcing seniors to pay up or move. Simply assuming that all those with reverse mortgages will soon have no equity is ludicrous.