My mother is 80, unmarried, and owns two homes on one lot in Berkeley, Calif. The property consists of one single-family home and one cottage. She lives in one and rents the other.
She has never really worked and has no savings. She rents one of the houses and lives in the other, getting by with the rental income and nominal Social Security of approximately $1,500 a month.
Due to expensive repairs needed during the last year, she now has no cash reserves, and she’d like to fix that. She would ideally like to tap into some of the equity in her home(s).
The mortgage balance is approximately $350,000 and the estimated property value is $1.2 to 1.4 million.
But the property title is held in the name of a living trust, of which myself and my sisters are beneficiaries. Because of the living trust situation, we have been advised that we cannot co-sign for any equity loans.
Alternatively, she could sell the house. But if she sold the house, even using the $250,000 tax exemption, I imagine a significant amount would go to pay capital gains tax.
So we’re confused as to what she should do next. She purchased the home for $110,000 over 30 years ago. She is house-rich, and extremely cash poor. What can we do to help her benefit from the extensive amount of equity in her home and not take a huge loss by selling?
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
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I understand the dilemma here.
Yes, she can take the home out of the trust and sell it, but as you said, the exemption on capital gains is only on the first $250,000.
Plus, if you sell this house, you lose out on the further home value appreciation. Considering how the home’s value has grown tenfold, it seems like a safe bet to assume that the home will appreciate even further.
On the other hand, if your mother takes out a home equity loan, or a home equity line of credit, she will get some cash. But at the same time, the process is cumbersome: She would likely have to remove the house from the trust (which means paperwork), take out the loan (which she may or may not qualify for with her income), and then put the house back in the trust (more paperwork).
Plus, these options carry their own risks. Yet they may be worth considering, if you want to hold on to your home.
Richard Anzelone, partner and chief compliance officer for StrategicPoint Investment Advisors, also suggested a reverse mortgage.
A reverse mortgage is a special type of loan available for those above 62, according to the Consumer Financial Protection Bureau. Homeowners can only take out a reverse mortgage on their primary residence, so the rental cottage wouldn’t be eligible.
These loans allow you to borrow against the equity built up in the home in order to pay down the mortgage. Note that you can’t borrow against the whole of the equity built up, because there’s a percentage that’s built in as a buffer should the house lose value.
You will not need to make monthly payments like a regular mortgage. The loan is paid back when she no longer lives in the home. But beware of interest and fees that can add up.
“With a reverse mortgage, the bank will make payments to the owner of the property with no obligation on the part of the owner to make payments to the bank while she is living in the home,” Anzelone explained.
“Upon the death of the owner, the property would go to the bank and any equity left over after the loan is paid off will go to the beneficiaries,” he added.
But proceed at your own risk, Anzelone stressed: “When applying for a reverse mortgage please make sure you understand all the costs involved and the process as a whole not only for you but also your beneficiaries.”
The CFPB says that you and whoever else inherits the house will need to repay the full balance to keep the home. If you want to sell it, you’d need to repay the full balance, or 95% of its appraised value, if the loan balance owed is more than the home value.
Ultimately, you’ve got to read the fine print. A reverse mortgage may be a good option for your mother.
But please consult the attorney or advisor who helped draw up the living trust before you proceed.
MarketWatch’s Beth Pinsker contributed to this column.
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