Sunday, September 16, 2007

Reverse Mortgages

You have probably seen the TV commercials about reverse mortgages for retired persons who need more income. But what you may not know is that I "invented" the reverse mortgage in 1989 - years before banks started offering it. In my book, "The Simple Man's Guide to Real Estate", it was aptly named the "Golden Years" method. And it has some serious advantages over the model that banks use.

Some major differences include:

*Reverse mortgages offered by a bank results in the equity in the home being transferred outside the family. This is not necessarily true with the Goilden Years strategy

* Reverse mortgages offered by banks tend to include high fees and expenses. With the Golden Years method, fees and expenses can be nearly eliminated

* Reverse mortgages offered by banks are limited in maximum dollar amounts, determined by the age of the homeowner. With Golden Years, there are no dollar limits, regardless of age

Our "Golden Years" method is the very same reverse mortgage, but it need not have any of the drawbacks that are listed above.

More important, a personal RM (ala Golden Years) can have substantial tax advantages. For example, if you use this method on your parents home, you transfer money to them, they transfer the home to you (upon their passing) without any gift tax problems. And, by transferring the equity to you, they can drastically reduce estate tax. And any fees or expenses incurred in using the Golden Years strategy are deductible.

Also, when the loan is repaid, your parents (or their estate) can take a nice deduction on the accumulated interest that is paid to you.

A note of caution: if you offer a reverse mortgage to a family member, be sure it is an "arm's length" transaction. In short, you must charge market interest rates (or close to it), and the contract must be legally enforceable.

No comments: