How Do I Model a Reverse Mortgage?
Suppose you have the option to take out a reserve mortgage, which, for example, entails your handing over 50 percent of the equity in your house at age 75 in exchange for an income stream starting at age 75.
I'd treat this as a change in home at 75 in which you purchase a new home for half the equity you have at that point (I presume the original mortgage will have been paid off by then), but the same property taxes and other expense.
In addition, you need to add in a special expense in that year equal to half the equity (less the transactions costs; i.e., 6 % of the sales value of the home)), and also enter the income stream you'll be getting as a special receipt over the rest of your life. I need to check whether this income stream is taxable. If so, you'd need to enter it as a taxable special receipt.
best, Larry
RSS
It doesn't seem that this method of modeling a reverse mortgage would correctly handle the 500K/250K capital gains exclusion, since in real life you're not actually selling the house.
You might end up with a bogus tax liability in the year you modeled taking out the reverse mortgage (if you have more than 500K (married - 250K single) gain in your home value).
You would definitely end up with an artificially low tax liability in the year you tell ESP you are going to actually sell the house (since it would reset the basis when you "sell" your home to model taking out the mortgage).
Why not just include reverse mortgages as an option in ESP?
Reverse mortgages (and a variety of loans and other common financial instruments) have been on our list for a while. The problem is resources. Small company, maxed people, more important (in our opinion, clearly) things to do. Generally speaking most of what you want to do can be accommodated using the special receipts/expenditures mechanism although it IS a pain and we realize that. We will be layering things on top of the this mechanism (that's how 529s are handled) in the future, we just don't have enough people to do this as fast as we would like.
Best,
Dick Munroe
I understand. This is a great product, and your support response is terrific. And, of course, bugs are more important than enhancements. But with many of us debt constrained and looking at the equity (diminished, but still there) in our homes, you'll probably continue to get this request.
- John
Believe me, we get it.
Best,
Dick Munroe
I am also interested in a better way to model reverse mortgages. Any progress on this since the last message 2 years ago?
Thanks.
Bob B.
No, sorry.
The article on “Standby” reverse mortgage use as a retirement strategy which was published recently in the Journal of Financial Planning (which found that was a very viable "risk management tool") should prompt renewed interest in this topic. Sounds a bit complicated to implement (?), but that's the point of having ESPlanner :-)