Reverse mortgage applicant 'shocked' by up-front fees

When are loan costs worth the risk?
Monday, April 18, 2005

DEAR BOB: I am currently applying for a reverse mortgage. But I think you should warn readers about the high up-front fees so that it is not a big shock, as it was to me. The closing costs in my situation will be almost $15,000. But in my case it is worth paying these expenses for a lifetime of tax-free income? – Ruth G.

DEAR RUTH: Yes, the up-front loan fees to obtain a senior-citizen tax-free reverse mortgage seem high. But they really are quite reasonable if you stay in your home for more than five years.

Before you obtain your reverse mortgage, the lender must provide you with a Total Annual Loan Cost (TALC) disclosure chart based on two years, your life expectancy, and even beyond your expectancy. If you keep your reverse mortgage only two years, the annual interest rate, including up-front loan costs, will usually be at least 12 percent, often more. But at 10 years, your annual cost typically drops to a much more reasonable 6 percent or 7 percent interest.

That's why I constantly advise against obtaining a reverse mortgage unless you plan to stay in your home at least five years. There are so many reverse mortgage advantages I can't list them all here. A great new book explaining this topic is Tom Kelly's "The New Reverse Mortgage Formula," available at bookstores, public libraries, and www.amazon.com.

HOW CAN MOM GET HOME TITLE BACK FROM HER KIDS?

DEAR BOB: I am a widow, 68, who made a stupid mistake about five years ago. Shortly after my husband died, my two adult sons convinced me to deed my home to them in case I had to go to a nursing home like my husband did before he died. Now I want to sell my home and move to Florida or Arizona. But they don't like my idea and refuse to sell the house so I will have the money to buy a retirement home in a warm climate. I think they like having me nearby to babysit the grandkids. What can I do? – Alice H.

DEAR ALICE: Because you no longer hold title to the home you are living in, there isn't anything you can do to force your sons to sell the house and give you the money to buy a Florida or Arizona retirement home.

Your sad situation shows why I constantly advise it usually is better to inherit real estate than to receive it as a gift before death.

Although I hope you retained a written life estate in the house and can live there as long as you desire, your life estate has little or no market value. The reason is when you die, your life estate dies.

Unless you have some written agreement with your sons, or can prove fraud or duress, I know of no way you can get back the title to your home so you can sell it. Consultation with a local real estate attorney is suggested, but don't get your hopes up.

HUSBAND AND WIFE CAN SPLIT UP TO CLAIM $500,000 TAX BREAK

DEAR BOB: My husband and I own a duplex where we have lived in one unit for almost 20 years. It has greatly appreciated in market value. A Realtor told us he can get a price that will give us a roughly $350,000 net profit. Having religiously read your articles every weekend for a long time, we know we can only use our $500,000 principal-residence-sale exemption on the profit from the sale of our personal unit. We would still owe capital gain tax on the profit from the sale of the rental unit. My question is can I (or my husband) move into the rental unit, live there for 24 months, and then can we claim the $500,000 principal-residence-sale exemption? – Cynthia R.

DEAR CYNTHIA: Yes. You can kick out the rental unit tenant and then move into the rental unit for at least 24 months before selling the property. In fact, you can both move in together. The tax reason is you have already met the 24-month occupancy test for your current unit.

After 24 months occupancy of the former rental unit, then the entire property will qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000.

However, I must warn you, Uncle Sam will "recapture" the depreciation you have deducted on the rental unit so your $500,000 exemption won't eliminate that special tax. For full details, please consult your tax adviser.

ARE FEES PAID TO MORTGAGE BROKERS TAX DEDUCTIBLE?

DEAR BOB: Are fees paid to a mortgage broker tax deductible? – Laura D.

DEAR LAURA: If you paid a loan fee, usually called "points" (each point equals 1 percent of the amount borrowed) on a principal residence acquisition mortgage, that loan fee is tax deductible as itemized interest in the year of your home purchase.

However, if the fee is paid to obtain any other type of mortgage, such as a refinance, then it can only be deducted over the life of the mortgage.

For example, if you paid a $1,000 loan fee to refinance your home mortgage with a 30-year mortgage, for the next 30 years you can deduct $33.33 of that loan fee as itemized interest.

Because of this usually small deductible annual amount, I suggest that when obtaining any mortgage other than a principal-residence acquisition loan, it is often best to obtain a so-called "no cost" home loan rather than paying a loan fee. For full details, please consult your tax adviser.

HOW CAN HOME SELLER PROTECT AGAINST ZEALOUS INSPECTOR?

DEAR BOB: I understand the value of a professional home inspection to home buyers. But I have also heard of horror stories from the seller's viewpoint. Over-zealous home inspectors have found minor defects. As the prospective seller of a 35-year old home, I expect our home has some flaws. What recourse, if any, do sellers have for over-zealous home inspectors? – Ken P.

DEAR KEN: As a home seller, before putting your home on the market for sale, you should have your own professional inspection made (along with a termite inspection and other customary local inspections, such as energy efficiency, radon, building code compliance, etc.).

I have done this many times. Then I usually have the recommended repairs completed before the home is exposed to the market. If I don't want to make the repairs, I just disclose the defect to prospective home buyers.

This technique is very impressive to home buyers. My experience has been buyers usually accept my professional inspection reports. If they don't, chances of their own inspectors finding defects are very rare.

DON'T FILE SMALL HOMEOWNER'S INSURANCE CLAIMS

DEAR BOB: You won't believe this, but a deer headed full force into the sliding glass door of our patio, smashing the glass. We were home and called the local humane society who quickly put the deer out of its misery. The humane officer said such incidents, while not frequent, happen because the deer was probably sick. My question is should I file a claim with my homeowner's insurance company for the $1,860 cost of replacing the glass and the damaged door frame? I have a $500 policy deductible. A neighbor tells me not to file a small claim like this (which I can afford to pay from my pocket). What would you do? – Steven V.

DEAR STEVEN: If you asked this question three years ago, I would have said file the homeowner's insurance claim. However, most homeowner's insurance companies have become extremely nasty in the last few years toward their policyholders.

Today, if you file too many claims, your insurer might cancel your policy. Or, your annual premiums could be increased substantially. If I were in your situation, I would do two things: (1) raise your deductible to at least $1,000 to save on premiums, and (2) not file that $1,360 claim.

CLEAR UP TITLE PROBLEM NOW RATHER THAN WHEN IT'S TOO LATE

DEAR BOB: In a recent article, you advised a widow how to remove her late husband's name from their home title. You said it depends how they held title. I recently checked our deed and it just lists my husband's name and mine. Nothing is said about being joint tenants with right of survivorship, tenants in common, or any other method. We have owned our home over 20 years. Can we change how we hold title? – Francine B.

DEAR FRANCINE: Yes. All that is usually needed is to record a quit claim deed from yourselves to yourselves, listing the title method you prefer.

It would be smart to clear up your method of holding title now while you are both alive and alert. Consult with a local real estate attorney for the best method of holding title in your state and situation to avoid probate when one spouse dies.

One method that always works is to sign a quit claim deed of your house title into your living trust so you maintain control but avoid probate. Also, each state has a "default" or presumed method of holding joint title between spouses if no method is specified. Take action now to resolve your title uncertainty.

The new Robert Bruss special report, "How to Get Started Investing to Earn Big Real Estate Profits," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.