Get Ready to Garage Sale

A well-planned garage or yard sale can make room in your home, get rid of unused items and make some money but it needs some planning to be successful.

• Start early to research and plan
• Promotion is key
• Display items attractively
• Price items right
• Organize checkout

Saturdays are generally the best day but there may be some exceptions.  Experienced garage-salers believe that a well-planned one-day event will do as well as a multi-day event.  Serious purchasers will look for the “new” sale and most people don’t come back multiple days.

Advertise in local newspapers and free online classified sites like craigslist.  If several families are going together for the sale, mention that in the ad; it will be a big draw.  Mention your bigger-ticket items like furniture, equipment and baby items.

Garage sale signs can be purchased or made at Staples, Fedex Office or Kwik Signs.  Signs need large lettering so they’re easy to read while people are driving. Most important info: Garage or Yard Sale, address, date and time.  Directional signs are also important.  Balloons and streamers to attract attention to the signs are very helpful.

Consider using the service Square so that you can take credit cards.  The cost is 2.75% per swipe and can be done on your smartphone or iPad.  You’ll need to sign up at least two weeks in advance to receive your reader.

Unless you’re having an estate sale, keep your home locked.  You don’t want people wandering through your home while you’re outside.  If you start to accumulate a lot of money, take some of it inside.  Don’t discuss how much money you’ve made during the sale or how successful it has been.

People will want to bargain; it’s the nature of the game.  Consider this strategy: less negotiations early in the sale and possibly, more toward the end of the sale.

Homeowner Tax Benefits

There are many reasons for wanting to have a home of your own like a place to raise your family, share with friends and feel safe and secure.  While investment opportunities rank high for most people based on the fact that homeowners’ net worth is over forty times higher than that of renters, so do the tax benefits that reduce tax liability.

• Taxpayers who have owned and used a home for at least two out of the last five years, can exclude a maximum of $250,000 of gain as a single taxpayer and up to $500,000 of gain for married taxpayers filing jointly.
• If the gain on a principal residence exceeds the allowed exclusion, the balance is taxed at the lower long-term capital gains rate rather than the marginal tax rate of the homeowner.
• Homeowners can deduct the interest paid on up to $1,000,000 of acquisition debt used to buy, build or improve their first or second home.  They may also deduct the interest on up to $100,000 over acquisition debt that is a recorded lien on their first or second home.
• IRS will allow taxpayers to decide each year whether to take the higher of the itemized deductions or the standard deduction.
• Points paid on new loans for home purchases are considered interest and can be deducted in the year paid. On the other hand, points paid for refinancing a home must be amortized over the life of the mortgage.

For more information, talk to your tax professional and see IRS publication 523 and IRS Publication 936.

ICE Can Save Lives

Everyone knows that ice can make a drink cool or reduce swelling, but if you put it on your cell phone, it might just save your life.

The concept is simple.  Make a contact record in your address book with the name “ICE”, which stands for In Case of Emergency.  In the note section of the record, you would list your name, blood type and medical conditions along with prescriptions and physicians.  You’d also list the people and their phone numbers that can be contacted in case of an emergency.

Several years ago, a British first responder came up with the idea when his emergency unit responded to a call where the victim was unable to communicate due to illness or trauma.  The victim’s wallet didn’t indicate specific persons to be notified in an emergency.  The fireman went through his cell phone to try to identify a relative and wasn’t successful.

That’s when he came up with the idea of a universal entry into the address book for ICE where the necessary parties and special information could be kept.  The story received a considerable amount of publicity and spread across the pond to the United States and into many other countries.

While it isn’t recognized everywhere, it is becoming increasingly more popular.  Even if emergency technicians didn’t find it, the slight possibility that they would find it and it would make a difference would justify the few minutes it will take to create it.  Click here to download a card to carry in your wallet or purse.

Don't Consider Appreciation or Tax Savings

Appreciation and tax savings are legitimate contributors to an overall rate of return on rental real estate but what if you didn’t consider them at all.  If you only looked at one or two, very conservative measurements, you might decide to invest especially knowing that there are more benefits that will accrue to your investment.

If we bought a property for cash, collected the rent and paid the expenses, the amount left would be called Net Operating Income.  In the example below, if would generate $7,200 a year which would be a 7.02% cash on cash rate of return which is considerably higher than the current 10 year treasury rate of around 2.3%.

If we place a mortgage on that property, the rate of return actually increases due to leverage.  After the principal and interest are paid, the net operating income obviously decreases but the cash on cash rate of return increases to 9.10% because the borrowed funds means less cash invested.

Another contribution to the investment’s rate of return occurs with the mortgage due to amortization: the principal reduces with each payment made which increase the investor’s equity.  In this example, the equity build-up divided by the initial investment yields a 5.25% rate of return in the first year.

Single family homes for rental purposes offer the investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with tax benefits, reasonable control and an opportunity to earn higher than normal rates of return.  Call if you'd like to talk about what kind of rental opportunities are available.

Being a Good Neighbor

A good neighbor might be characterized as someone who’ll look after your home when you’re out of town by picking up your mail and watering your plants.  You’d most likely reciprocate for anyone who’d be so generous toward you.

In some cases, you might only be able to name one or two of your neighbors who would step up to that level of service.   Wouldn’t it be nice if more people on your street would be happy to make that offer?

The solution may just start with being a better neighbor first.  The following suggestions go a long way to improving your neighborhood and making new friends at the same time.

• Meet your neighbors and exchange phone numbers and email addresses.  Agree with each other that you’ll let them know if you see something strange going on at their home. 
• Slow down when driving through the neighborhood; it will make it safer and everyone will appreciate it. 
• Control your dog: keep it on a leash; pick up after it; don’t let it bark too much.
• Don’t park in front of your neighbor’s home.
• Notify your immediate neighbors when you’re having remodeling done and ask them to let you know if any of the contractors cause damage to their property.
• Let your neighbors know when you’re having a party and that there will be more cars on the street than usual.
• Maintain your home and yard so that it adds to the beauty of the neighborhood.
• Put your garbage out for collection on the correct day and bring the containers back in promptly.

In reality, it is fairly obvious; you just have to think of the things that you’d want from your neighbors.  Be friendly; don’t be noisy; offer a helping hand when available and respect each other’s boundaries.  Having a sense of community and that you all share the neighborhood can be underlying principles that will guide your behavior.

A good neighbor would be aware of suspicious activity and would call their neighbors and the police if warranted.  This might be something you can discuss with your neighbors.  Click here for a template to record your immediate neighbor’s contact information and keep readily available if needed.

Holiday Tree Safety

Fresh holiday trees are beautiful, smell great and really add to the spirit of the season.  Following some proven safety tips might help you avoid a disaster and keep the Grinch away.

• Select a tree with fresh green needles that don’t fall off when touched or when the trunk is tapped on the ground.
• When trees are cut too early, they have a greater risk of drying out and can become more dangerous especially with electrical lights.
• Cut 1” to 2” off the base of the tree before placing it in the stand to facilitate it drawing water to the limbs and quills.
• Trees require water similar to cut flowers or they’ll dry out. Tree stands should hold at least one gallon of water and it should be checked every day.  A six foot tree could use up to a gallon of water every two days.
• Position the tree a minimum of three feet or further from heat source like fireplaces, space heaters, heat vents or candles.  Do not allow the tree to block an exit.
• Lights should be labeled from an independent testing laboratory and intended for indoor use.
• Follow manufacturer’s recommendations for how many strings of lights can be connected to each other.
• Turn off all tree lights when you go to bed or leave the home.
• If the tree becomes dry and begins shedding needles, it can be a fire hazard and should be removed from the home.  Even if the holidays are not over, it is not worth the risk to keep it in your home.
• After the gifts have been opened, don’t return the paper and boxes under the tree.
• Remove the tree as soon as possible after the holidays.
• Trees should never be burned in a fireplace.  The trees will burn very hot and quickly when they are dry and could spread outside of the fireplace which could cause an unfriendly fire.
• Check to see if there is a recycling program for holiday trees in your community.

The National Fire Protection Association reports that “one of every three home Christmas tree fires are caused by electrical failures and a heat source too close to the tree causes roughly one in every six of the fires.”

Verify with Your Lender

If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return.  After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

IRS requires that expenses must actually be paid in the year that a deduction is to be taken.

The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due.  If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.

Verify with your lender after you make the December payment that they did indeed pay your property taxes.  The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

Consider an Adjustable Rate

With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan.  The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.

For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.

 

Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing.  This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate. 

On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage.  The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.

A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision.  You can try the Adjustable Rate Comparison with your own numbers to see the effect.

Realize Tax Savings Sooner

A homeowner’s tax saving benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes.  Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.

It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks.  Employees would talk to their employers about increasing their deductions stated on their W-4 form.

By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more in each pay check.  If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.

Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work.   Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.

Talking Points with an Agent

A list of talking points can be very valuable to guide the conversation with an agent that will lead to a decision to have him or her represent you in the sale of your home.  If you haven’t been through the process before or it has been a while, the answers to these questions can reveal things about the experience and where-with-all of your candidate.

Even if you only intend to interview one agent and maybe they are a trusted friend, it is appropriate to understand how different issues will be handled.  Professionals should not feel challenged to discuss these important concerns.

1. Tell me about your experience and training.

2. Do you work real estate full-time?

3. Are you a REALTOR® and a member of MLS?

4. What is the average price of the homes you have sold and how many did you sell last year?

5. Which neighborhoods do you primarily work?

6. How many homes have you sold in my neighborhood?

7. What is your list price to sales price ratio?

8. How many buyers and sellers are you currently working with?

9. Tell me about the positives and negatives of my home?

10. Describe your marketing plan for my home and if you will use outside professionals.

11. Specifically address Internet exposure, open houses and showings.

12. Describe how you’ll keep me informed all along the way.

13. Will I work directly with you or with team members?

14. Can you provide me with three recent references?

You might have noticed that price was not in the list of talking points.  The seller sets the price but the market and the buyer determine the value.  The agent can advise you about the proper range that will insure activity and ultimately affect your final proceeds.  The advice should be based on facts that are available to all agents as well as the prospective buyers and the appraisers.

The decision to list a home with a particular agent and company should never be based on the listing price suggested by the prospective agent.

Relax...There's an Alternative

Is the stock market keeping you up at night?  Are you consuming more antacids than ever before?  Are the ups and downs causing more stress than you want or need?  There is a simple alternative in rental real estate.

Single family homes for rental purposes offer an excellent rate of return in an investment that most people understand better than other investments.  The concept is simple: stay with predominantly owner-occupied homes in a slightly below average price range.  In most areas, tenants are easy to find and they’ll usually stay two to three years or more.

For the person who doesn’t want to be bothered with calls from tenants, professional management is available and commonly won’t dramatically affect the rate of return.  Managers can achieve economies of scale that individuals can’t due to managing multiple properties and having good connections with the best workmen.

Unlike most commercial property, single family homes are much more liquid because of the higher demand for residential property.  Single family homes offer the investor the opportunity to borrow high loan-to-value mortgages at fixed interest rates, for long periods of time on appreciating assets with tax advantages while providing the investor a higher than normal level of control.

Spend an hour investigating the benefits and you might sleep better at night, eat less antacids and find yourself more mellow than you’ve been in years.

Save Interest, Build Equity & Shorten the Term

If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.

Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.

Check out what would happen if you were to make additional payments on your mortgage.

Enjoy Your Improvements and Profit by Them

Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.

Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.

Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.

Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.

Here’s a simple idea that could save you money years from now.

Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.

Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.

Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.

Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.

Crafting an Accecptable Offer

An agent was presenting a contract to a single, senior woman who was moving into a retirement home.  It was a full price offer with reasonable terms and timelines but the seller wouldn’t accept it.  When the agent probed deeper, she discovered that the seller was concerned with her dining room table.

It had been the first piece of nice furniture that she and her husband had purchased and they had literally spent a lifetime celebrating and making decisions at that table.  It troubled the owner to think that the table would go to strangers who might not appreciate it as much as her family had.

The agent told the elderly seller that she knew of a church nearby that had a community room filled with lovely tables like hers.  If she liked the idea, the agent would call the church to see if they’d like to have it.  Once a new home for the table was found, the sale of the home went smoothly.

Lower inventory and increased demand in certain price ranges have increased the frequency of multiple offers on the same home.  Sellers are frequently faced with a decision dilemma on which offer to accept and the price may not be the most important factor.

Sellers generally need the equity from the sale of their home to purchase another one but they also don’t want to have to temporarily move if they’re not able to get into the home they’re purchasing.  Flexible buyers have discovered the value in coordinating the sale and possession of the homes.

Sellers want to know when they make a decision on an offer, that the buyers will be able to perform as the contract is written.  The more contingencies that can be eliminated or minimized, the more comfortable a seller will feel about the certainty that it will close according to schedule.

The buyer should be pre-approved with all verifications and credit reports having been done.  Simply having a loan officer’s opinion is definitely not the same thing as a pre-approval.

There is a unique dynamic to every transaction because the parties are individuals with infinite priorities and values.  The art of the deal takes place when these unique variables are considered to define a mutually acceptable offer involving price, terms and conditions. The role and experience of the agents contribute to the successful outcome.

Annual Maintenance

A common expectation of homeowners is to want the components and systems in their home to work when they need them. Periodic maintenance is just as important as having a trusted service provider to make necessary repairs.

Victims of Murphy’s Law can attest that their air conditioner goes out on the hottest day of the year or the water heater fails when you have out of town visitors.

If the convenience of having things work doesn’t justify maintaining your home’s systems, consider that it can be less expensive than the results of neglect causing repairs or replacement.

• Replace burned-out, dim or missing bulbs in light fixtures and lamps. Consider switching to LED bulbs.
• Dryer exhaust vents build up lint even though you may be cleaning the filter regularly.
• Fire extinguishers need to be recharged or replaced after expiration date.
• Establish a recurring appointment on your calendar to change filters in your HVAC.
• Replace missing or damaged caulk around sinks, bathtubs, showers, windows and other areas.
• Clean gutters.
• Schedule an inspection with a pest control a minimum of once a year unless you have a service contract.
• Schedule a chimney cleaning prior to using the fireplace for the first time in the season.
• Keep all tree branches and shrubs trimmed away from the home.
• Pressure wash exterior, deck, patio, sidewalks and driveway.
• Keep levels of insulation in the attic above your ceiling joists.
• Check appliances with water lines for leaks or worn hoses.
  • ice maker  • washing machine   • dishwasher   • others
• Test all GFI breakers and reset.
• Inspect all electrical outlets for broken receptacles, fire hazards or loose fitting plugs.
• Have furnace and air conditioner serviced annually.
• Test smoke and carbon monoxide detectors and change batteries.

The early fall is a great time to take care of these items before the weather becomes harsh.

Money Down the Drain

Private mortgage insurance is necessary for buyers who don’t have or choose not to put 20% or more down payment when they purchase a home.  It is required for high loan-to-value mortgages and it provides an opportunity for many people to get into a home who otherwise would not be able.

The problem is that it is expensive and a homeowner’s goal should be to eliminate it as soon as possible to lower their monthly payment and avoid putting good money down the drain.

FHA loans made after 6/1/13 that have 90% or higher loan-to-value at time of purchase have mortgage insurance premium for the life of the loan.   FHA loans made prior to 6/1/13, can have the MIP removed after five years and if the unpaid balance is 78% or less than the original loan-to-value.

VA loans do not require mortgage insurance.

Conventional loans, in most cases, with higher than 80% loan-to-value require mortgage insurance.  The cost of that insurance varies but with a $250,000 mortgage, it could easily be between $100 and $200 a month.

Your monthly mortgage statement should itemize what your monthly fee is for the mortgage insurance.   Unlike interest that is deductible, most homeowners are not able to deduct mortgage insurance premiums.

If you plan to remain in the home or to stay there for a considerable number of years, the solution may be to refinance the home.   If the home has increased since it was purchased, the loan-to-value at its new appraised value may not require PMI.  You might even be fortunate enough to obtain a lower rate than you currently have.

Cash Flow and Equity Build-up

Many years ago, Las Vegas hotels would entice customers with inexpensive rooms, meals and entertainment so they would gamble.  It may have worked initially but if you’ve been to Las Vegas recently, the bargains are gone.  Hotels expect each division to be a profit center on its own.  As a consumer, I might not like the changes but as an investor, I’d have to be pleased with increased profitability.

Years ago, real estate investors used to accept negative cash flow buoyed by tax incentives in hopes of making a big payday due to appreciation when they sold it.   Today’s investors are focusing on tangible, current results like cash flow and equity build-up.

Cash flow is the amount of money you have left over after collecting the rent and paying the expenses.  Since rents have gone up considerably due to supply and demand in the last few years and mortgage rates are at near record lows, income is up and expenses are down, making the cash flows attractive.

If the cash flow is sufficient, you could have a good investment even if the value of the property never increased.  Cash on Cash doesn’t consider appreciation and measures the cash flow before tax advantages by the initial investment.  A rental with $3,170 CFBT divided by an initial investment of $29,000 would generate a 10.93% Cash on Cash rate of return.

Low down payments on investor properties are also a thing of the past.  Non-owner occupied mortgage money is available but the investor should expect to put down 25-30%. An advantage of having a smaller mortgage is a lower payment.

Most mortgages are amortized loans with both principal and interest due with each payment.  The forced savings of the principal contribution builds equity in the property and can be considered a part of the rate of return.

A $100,000 mortgage at 4.5% for 30 years would have $1,613.29 applied to principal in the first year.  Divide that by the same $29,000 initial investment and the amortization would generate another 6%.

Without factoring in appreciation or tax advantages, this rental example generates much more than most alternative investments.  There certainly are many different aspects that affect the risk and return on rental investments.  If you haven’t scrutinized single-family rental opportunities in a while, you should look again.

Which Filter to Use?

A dirty air filter decreases the effectiveness of your HVAC system because it inhibits airflow and allows dirt, dust, pollen and other materials to blow through the system.

The challenge is how often it should be changed to keep the system working efficiently and extend the equipment life. Too often and you’re wasting money and not often enough and your increasing the operating and maintenance costs.

Fiberglass panel filters are inexpensive and easy to find but they’re not very efficient and they allow most dust to pass through. They were popular years ago but there are much better products available currently.

Pleated air filters are available in MERV ratings from 5 to 12. As these filters collect dirt and other particles, they become less efficient to the point of impacting air flow. Allergy sufferers can benefit from this type of filter. These should be changed every two to three months based on local conditions.

HEPA filters stand for High Efficiency Particulate Arrestance. They are very efficient and more expensive than previously described filters. Since they are very efficient, they require changing more frequently; possibly, every month.

Electrostatic air filters are permanent and washable. They generally cost more initially but the savings will be based on how long they last. This type does not add to landfill issues or produce ozone.

Improperly maintained filters will lower the quality of the air in the home, have a negative impact on air flow, cause it to use more electricity and eventually require maintenance to the systems.

In an attempt to easily comparing filters, a rating system was created called MERV, an acronym for Minimum Efficiency Reporting Value. The rating from 1 to 16 indicates the efficiency of a filter based on standards set by ASHRAE. Higher ratings indicate a greater percentage of particles are being captured in the filter.

To create a system to remind you when to change your filters, set a reminder on your electronic calendar to recur for whatever frequency you determine is best for you. Be sure to keep a supply of filters on hand to be ready to change them out when the time comes.

How's Your Memory?

How old is your bedroom furniture and what did you pay for it?  Don’t know?  That’s okay, let’s try an easier question.  When did you buy the TV in your family room and is it a plasma, LCD or a LED?

Whether you are the victim of a burglary, a fire or a tornado, most people are comforted they have insurance to cover the losses.  However, unless you’ve filed a claim, you may not be familiar with the procedures.

The adjustor will want to know the date and how the loss occurred.  Assuming you have contents coverage, the claim for personal belongings is separate from damage to the home.

You’ll be asked to provide proof of purchase, like receipts or cancelled checks, or a current inventory.  If they’re not available, you can reconstruct an inventory from memory.  The challenge is trying to remember things you may not have used for years and may not miss for years more.

Relying on memory can be a very expensive alternative.  A prudent homeowner will create a home inventory with pictures or videos while all of their belongings are in the home and they can see them.

Download a home inventory to make your project a little easier.

Reverse Mortgage

With all of the encouragement from celebrity spokespersons like Fred Thompson, Robert Wagner and Henry Winkler, there is a growing awareness of reverse mortgages.  The fact is that our population is getting older and more than 25 million homeowners meet the age requirement.

A reverse mortgage will allow homeowners age 62 or older currently living in their home to tap into their equity. The amount available is determined by the borrower’s age, the home’s current value and current interest rates.  The loan proceeds can be received in a single, lump-sum or periodic payments.  The closing costs can be paid in cash or rolled into the loan amount. 

There are no payments on a reverse mortgage but the homeowner is still responsible for property taxes, insurance, maintenance and other home costs. 

When the borrower dies, moves or fails to fulfill the terms of the loan, the lender is paid from the sale of the home.  The borrower or their estate is not responsible for more than the proceeds of the sale.  However, if the proceeds are greater than the amount owed to the lender, the remainder goes to the homeowner or their heirs.

Unlike normal mortgage requirements, the borrower’s income and credit are not used to determine the amount of the loan.  The homeowner must occupy the home as their principal residence and it must be free and clear of encumbrances or have substantial equity.

Reverse mortgages are an opportunity to generate income or funds for capital expenditures but they can pose risks to homeowners.  HUD, the largest insurer of reverse mortgages, is concerned about misleading or deceptive program descriptions encouraging borrowers to obtain HUD reverse mortgages also known as the HECM (Home Equity Conversion Mortgage).  As of June 18, 2014, FHA will only insure fixed rate reverse mortgages where the homeowner is limited to a single, full draw made at closing.

A reverse mortgage, like any financial decision involving a home, is an important decision that deserves careful consideration, due diligence and expert advice. 

For more information, check out The National Association of REALTORS® Field Guide to Reverse Mortgages, FAQs about HUD’s Reverse Mortgages  and Reverse Mortgages – Alternative Home Equity Funding by Real Estate Center at Texas A & M.