Mrs. H, in Southern California just signed her loan documents on a reverse mortgage. At over 80 years old she qualified for an amount sufficient to pay off her current loan and establish a line of credit for over $300,000.00. With the advice of her financial planner, and the blessing of her children, she left the money in a line of credit where it will grow. Her goal is to use the funds to pay for in home health care at such time as she may need it. Since she hasn't "borrowed" the available funds in the line of credit, her equity in the home is far greater than if she had taken all the funds in a lump sum.
Based upon HER needs I think this was a great option! Another person may have been better served by selling the home and moving into an apartment or condo and investing the proceeds into something safe. But she did not want to leave the home and would have had to pay a capital gains tax which would have been considerable as the home was appraised at almost 2 million dollars and she bought it for less than $70K over 40 years ago! The tax hit on that would have been far greater than the cost of the reverse mortgage. More importantly, it would have broken her heart to ever leave her home.
What do you think?
Deborah Nance, Reverse Mortgage Professional for Corona, the Inland Empire and Southern Californa.
I'm a little confused why she has a $2 million home, purchased 40 years ago for $70,000, but got a reverse mortgage that paid off the current loan but left only a $300,000 line of credit." Had she gotten some additional loans over the years?
I would also hope that during the course of 40 years, she had some home improvements done. If she kept the receipts, then the cost basis would be higher than the initial $70,000.
I can't imagine the increase in home values over 40 years is the only thing that has resulted in a $70,000 1959 property increasing in value to $2 million in 2009.
Yes Jim, you are correct. She did get another loan over the years just a small one for a bit over $70000. The FHA Lending Limit is only $625,500 for HECM's and FHA sets out the amount she can borrow by using a formula that is based upon her age, the lending limit/home value (whichever is less) and the expected interest rate. An FHA Reverse Mortgage does not give homeowners a large loan to value and having a high value home does not allow for any more loan amount as far as FHA Reverses are concerned. There were some proprietary reverse mortgages awhile back on the market, Financial Freedom's Cash Account and Bank of America's Independence Plan. They allowed homeowners to borrow based upon the home value up to 2 to 4 million and the client's age.
There should be plenty of equity available for this homeowners heirs even if she taps into the entire line of credit. In the meantime she can stay in her home. Because of her awesome location in Los Angeles her home has in fact increased from the original purchase price of less than $70K to almost 2 million. You know what they say - Location, Location, Location!
Wow, that's great that she is able to stay in her home. And good forethought to arrange this before it became necessary.