Refinance home to pay off credit card?

Option would roll $50K debt into tax benefit

By Inman News Feed
Add Comment Add Comment | Comments: 1 | Posted Nov. 9, 2009

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DEAR BENNY: What is a "reverse mortgage" and how does it work? I will be 62 in December and my wife is 58. Our home was built in 1992. We currently have a 30-year fixed-rate mortgage with a balance of $145,000. The monthly payment is $900, and the current market value is approximately $300,000. I am retired and my wife works for the local school system.

What are the advantages and disadvantages of a reverse mortgage? Who owns the house? Who gets the house if we should both die? If it goes to our beneficiaries (children), what are the tax issues? If we had a reverse mortgage could we still sell the house and downsize? Who gets proceeds from the sale? Where can one get a reverse mortgage? --Milan

DEAR MILAN: Unfortunately, I have some bad news for you. In order to be eligible for such a mortgage, you and your wife must both be at least 62 years old. Because your wife is a young 58, you will have to wait four more years.

A reverse mortgage is a loan to you based on the equity in your house. You can take the money out in one of three ways: (1) a lump sum, (2) monthly payments, or (3) a line of credit -- which gives you a checkbook on which you can write any amount, up to the loan limit.

You and your wife would continue to own the house. When you sell it, move out or die, the house will have to be sold so that the loan will be paid. Alternatively, your heirs can keep the property if they are able to find other sources for this payoff. Any surplus over and above the amount of the mortgage is yours (or your heirs) to keep.

Space in this column does not permit a full explanation. You will find a lot of helpful information on the Web, just by typing in "reverse mortgages" at your favorite search engine. I suggest, however, that you start with the AARP Web site for basic, impartial information.

DEAR BENNY: We have a home in North Carolina that we have lived in for 24 years. Five years ago we purchased a modular home in Florida that we live in six months of the year. We changed our residence to Florida about three years ago. If we sell our home in North Carolina, would we be able to take the tax exemption? --Richard

DEAR RICHARD: If you had not changed your residence, and if you can show that you owned and lived in the North Carolina house for two out of the five years before sale, you would have been able to claim the up-to-$500,000 exclusion of gain (or up to $250,000 if you file a separate tax return).

But by changing your official residence to Florida, I believe you will no longer be able to call the North Carolina home your "principal residence." I understand why you changed to Florida, as the laws are probably more favorable, but by doing so you missed out on the opportunity to take the exclusion.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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1. Tamara Holmes said... on Nov 10, 2009 at 06:04AM

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