The Equity Is There, the Income Is Not
Frank, 74, and Alma, 69, have been married 44 years. Their home is worth about $615,000 and carries a $182,000 mortgage at 4.25%, refinanced four years ago to help their son; the payment, including taxes and insurance, is $1,190. Frank receives $2,410 a month in Social Security; Alma receives $980; Frank has a $410 pension. They have $31,000 in savings and a roof that will need replacing within a year at an estimated $19,000. Frank's Medicare Part B and supplement cost $310 a month, and his prescriptions $140. Frank's basis in the home is roughly $95,000, and the deed is in Frank's name only - Alma has never been added. Both want to stay.
1. Frank asks whether a reverse mortgage will "pay off the house and give us the roof money." What has to be true before that works, and what specifically about the title matters?
Read the worked answer
A HECM requires at least one borrower aged 62 or older (met), the home as principal residence (met), and a financial assessment covering the willingness and ability to keep paying taxes, insurance, and upkeep. If that assessment is weak, the lender imposes set-asides taken out of the proceeds - which shrinks what is actually available. The existing $182,000 mortgage is paid off at closing out of the loan proceeds; what remains is driven by the age of the youngest borrower, the appraised value up to the program limit, and current rates. It is a loan against equity, not a substitute for income, and the balance grows over time.
The title point is the live one. To be a borrower, Alma must be on title. A spouse who is not on title and not a borrower can face a loan that comes due at the borrower's death; the non-borrowing-spouse deferral rules are technical and state-sensitive. The cleaner structure is to add Alma to the deed now and have both of them as borrowers - and that raises a separate question about how title is held and what happens at the first death, which is an attorney's call, not yours. Solve the deed before shopping the loan.
2. They ask, "Would we just be better off selling?" Run the numbers and the reasoning.
Read the worked answer
Rough numbers. $615,000 value less $95,000 basis less selling costs of roughly 7% (about $43,000) leaves a realized gain near $477,000. If they file jointly and Frank meets the two-of-five-year ownership and use test, Section 121 excludes up to $500,000 - so probably no federal tax, subject to a preparer's confirmation and state rules. Net equity after payoff and costs is roughly $390,000.
What that buys. A comparable one-level home nearby may cost as much as or more than $390,000, and they would trade a fixed 4.25% payment for whatever the market offers, plus moving costs and the disruption.
Case for staying: low fixed housing cost, familiarity, proximity to physicians and church, and the ability to convert equity without selling.
Case for selling: the payment and the roof are the cash-flow problem, and a reverse mortgage converts equity to cash at the price of closing costs and compounding interest.
Present both sides with the arithmetic attached and let them decide. What you must not do is imply that the reverse mortgage is free money or that the sale is tax-free without a preparer's sign-off.
3. Frank dies first. What happens to Alma under each option?
Read the worked answer
If Alma is on title and a co-borrower: she simply continues. Nothing comes due.
If she is on title but not a borrower: the loan is generally due when the last borrower dies. The eligible non-borrowing-spouse deferral rules may let her stay if she was married to the borrower at closing, was properly disclosed, and continues to meet the obligations - but this is a technical area and she should not stake her housing on it.
If she is not on title at all: she inherits by will or intestacy, and the payoff is due unless she can refinance. If she cannot qualify, the house may have to be sold, and possibly at a bad moment.
If they sell instead: she gets a step-up in basis on Frank's half at his death (generally the entire property in a community property state), which is an argument against liquidating everything before death, and she retains her own $250,000 Section 121 exclusion if she sells later within the use-test window.
The planning point is that the deed, not the loan product, is the thing to fix - and it should be fixed while both are alive and competent.