Money Talk: A re­verse mort­gage might be a good idea.

For some older home­own­ers, a loan could help pre­serve qual­ity of life and fi­nan­cial flex­i­bil­ity.

Los Angeles Times - - BUSINESS - Liz We­ston, cer­ti­fied fi­nan­cial plan­ner, is a per­sonal fi­nance colum­nist for Nerd­Wal­let. Ques­tions may be sent to her at 3940 Lau­rel Canyon, No. 238, Stu­dio City, CA 91604, or by us­ing the “Con­tact” form at askl­izwe­ston.com. Dis­trib­uted by No More Red Inc

Dear Liz: I re­cently re­tired to a small house I bought 30 years ago. I re­fi­nanced four times to get the rate down from 11% to 3.5%. This pro­vided me with a low monthly mort­gage (just un­der $450), but my cur­rent 30-year loan won’t be paid off un­til I’m 92. I’ll be 67 in two months, and just re­ceived an in­her­i­tance of $400,000 fol­low­ing the death of my par­ents. My only in­come is a $2,000 a month from So­cial Se­cu­rity and a monthly pen­sion check of $1,100, al­though I do have an IRA that should be worth roughly $170,000 by July.

I’m think­ing about pay­ing off the $90,000 re­main­ing on my mort­gage, which would al­low it to be passed on to my sis­ter, nephew (or whomever) with­out any com­pli­cated bank or loan is­sues. It also would free up that mort­gage pay­ment for other house­hold ex­penses. The house needs some work, such as a new car­port, dou­ble-pane win­dows, proper in­su­la­tion, deck re­pair and maybe ter­mite work, all of which will prob­a­bly eat up the bet­ter part of $100,000. Is it worth keep­ing the loan just to main­tain the tax de­duc­tion or does it makes fi­nan­cial sense to pay it off? An­swer: Keep­ing a mort­gage just for the tax de­duc­tion doesn’t usu­ally make much sense. Here’s why: If you’re in the 25% fed­eral tax bracket, you’re get­ting back only about 25 cents for each dol­lar in in­ter­est you pay. Most home­own­ers get even less back, and many don’t get any tax ad­van­tage from their mort­gages at all.

It can make sense, though, to keep a mort­gage to pre­serve liq­uid­ity. Younger peo­ple, es­pe­cially, should be wary of ty­ing up most of their net worth in a home if that eq­uity would be hard to tap in an emer­gency. Home eq­uity lines of credit of­fer one way to ac­cess that eq­uity, al­though lenders can freeze or re­duce those lines on a whim.

Be­cause you’re over 62, you could con­sider pay­ing off the loan and then set­ting up a re­verse mort­gage line of credit.

An FHA-in­sured re­verse mort­gage line of credit can’t be shut down once it’s es­tab­lished, as long as you abide by the loan rules (such as pay­ing your prop­erty taxes and in­sur­ance, and keep­ing the home in good con­di­tion). In fact, the amount you can bor­row can in­crease over time with a re­verse mort­gage credit line. You don’t have to make monthly prin­ci­pal and in­ter­est pay­ments on the money you bor­row with a re­verse mort­gage.

Any amount you bor­row will grow over time, typ­i­cally at vari­able in­ter­est rates, and will have to be re­paid when you die, sell or per­ma­nently move out of the home. That would com­pli­cate leav­ing the house to your heirs, but if the amount you owe is greater than the home’s worth, your heirs aren’t on the hook for the dif­fer­ence with an FHAin­sured re­verse mort­gage, also known as a Home Eq­uity Con­ver­sion Mort­gage.

In any case, pre­serv­ing an in­her­i­tance prob­a­bly shouldn’t be your top pri­or­ity. You should fo­cus in­stead on pre­serv­ing your qual­ity of life and your fi­nan­cial flex­i­bil­ity.

Re­verse mort­gages have got­ten safer and less ex­pen­sive in re­cent years, but you would need to ex­er­cise dis­ci­pline not to waste the money you bor­row on friv­o­lous pur­chases. You want that eq­uity to be avail­able for you when you need it, such as for nurs­ing home or other long-term care ex­penses.

You would be re­quired to get coun­sel­ing be­fore ap­ply­ing for a re­verse mort­gage, but you also should talk to an in­de­pen­dent, fee-only fi­nan­cial plan­ner to make sure this ap­proach makes sense.

Liv­ing trusts and tax ad­van­tages

Dear Liz: You men­tioned re­cently that there are no tax ad­van­tages if your as­sets are held in a liv­ing trust. Aren’t you for­get­ting the tax ex­emp­tion fea­ture that al­lows an ex­emp­tion of $5.49 mil­lion for each per­son? Hence a mar­ried cou­ple can ex­clude up to about $11 mil­lion of their es­tate through an ap­pro­pri­ate liv­ing trust. And the un­used por­tion for the first spousal death can be “ported” or used by the suc­ces­sor spouse. Th­ese are big tax im­pli­ca­tions that I be­lieve are avail­able only through a liv­ing trust. An­swer: That’s a com­mon mis­con­cep­tion, but the es­tate tax ex­emp­tion is avail­able with or with­out a liv­ing trust. The pri­mary pur­pose of a liv­ing trust is to avoid the court process known as pro­bate that oth­er­wise fol­lows death, not to avoid or re­duce es­tate taxes.

Benny L. Kass Getty Images

RE­VERSE MORT­GAGES have got­ten safer and less ex­pen­sive in re­cent years, but dis­ci­pline needs to be ex­er­cised so that the money bor­rowed is there when you need it, not wasted on friv­o­lous pur­chases.

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