Reverse Mortgage Is Not a 100%-Safe Refuge

When you consider about a reverse mortgage and you meet all the requirements, your lender always claims that your reverse mortgage will become payable only if you pass away or lose the ownership of your property, so you don’t need to make a monthly payment as other typical mortgages.

You may ask further whether it is possible for you to owe more than your home equity. You are informed that it won’t happen because the federal government will pay for the difference in case your loan balance exceeds the home equity, if you choose HECMs.

After hearing all these words, you perhaps have a peace of mind about reverse mortgages, and mistakenly think that your reverse mortgage will not go into default as long as you own the property and live in the house. However, the truth is that you are still vulnerable to default.

Recent data told us that reverse mortgage defaults increased by 1.3% from 8.1% in 2011 to 9.4% in 2012. The majority of these default cases are triggered by failure to pay for the property tax or home insurance, which gives us a reason to operate an analysis.

Take a closer look at property tax

Property tax, a main source of revenue for U.S. government, is imposed on the properties. It is determined by three elements: house value, property tax rate, and assessment ratio. To get the final figure, you can multiply them together, that is, house value * property tax rate * assessment ratio.

• Property tax rate (current property tax rates are available below for reference)

Alabama: 0.33%

Alaska: 1.04%

Arizona: 0.72%

Arkansas: 0.52%

California: 0.74%

Colorado: 0.6%

Connecticut: 1.63%

Delaware: 0.43%

Florida: 0.97%

Georgia: 0.83%

Hawaii: 0.26%

Idaho: 0.69%

Illinois: 1.73%

Indiana: 0.85%

Iowa: 1.29%

Kansas: 1.29%

Kentucky: 0.72%

Louisiana: 0.18%

Maine: 1.09%

Maryland: 0.87%

Michigan: 1.62%

Minnesota: 1.05%

Mississippi: 0.52%

Missouri: 0.91%

Montana: 0.83%

Nebraska: 1.76%

Nevada: 0.84%

Ohio: 1.36%

Oklahoma: 0.74%

Oregon: 0.87%

Tennessee: 0.68%

Texas: 1.81%

Utah: 0.6%

Vermont: 1.59%

Virginia: 0.74%

Washington: 0.92%

Wisconsin: 1.76%

Wyoming: 0.58%

District of Columbia: 0.46

New Hampshire: 1.86%

New Jersey: 1.89%

New Mexico: 0.55%

New York: 1.23%

North Carolina: 0.78%

North Dakota: 1.42%

Rhode Island: 1.35%

South Carolina: 0.5%

South Dakota: 1.28%

West Virginia: 0.49%

Pennsylvania: 1.35%

Massachusetts: 1.04%

• As for the assessment ratio, you can visit the website below and check it:

http://orpts.tax.ny.gov/cfapps/MuniPro/rar/srarsearch.cfm?swis=59

Suppose you have a house located in the city of Albany (New York) and the appraisal value of your house is $200,000. Now you have no other mortgages on your house. So with the help of a reverse mortgage calculator, you know that every month you can receive $594 to cover your living expenses.

You property tax will be $2569.224 ($200,000 * 1.23% * 104.44%) in total. Please note that the payment of property tax varies from place to place. The property tax might be paid monthly, annually, or quarterly. It’s up to the regulation in your state.

In the case of New York State, you can pay for your property tax either semi-annually or quarterly. If your house value is less than $250,000 (include $250,000), you are required to make the payment quarterly meaning four times a year. If your house value is more than that, you should pay the property tax semi-annually, which means twice a year.

According to the state regulation, you must pay your property tax four times a year. In other words, you should pay about $642 every three months. As a result, you’d better set aside $214 per month to prepare for the due date. Don’t forget you have to pay home insurance which costs you about $50 per month, for example. Now you have $330 left in your pocket.

Tell me how you can survive with $330 each month. Not to mention other expenses like gas, electricity, telephone bill and water bill, $330 is even not enough for food expenditure. And you are not young anymore, you need to pay medical bills more often than previous years. Plus, what if there is an emergency?

In a nutshell, reverse mortgage can’t be viewed as a 100%-safe refuge. Of course, things might be better if you are older, your house value is higher and the property tax is not that much. The figure I have presented is just a hypothetical sample, you have to do calculations in your special situation and figure out whether a reverse mortgage is perfect for you.

By the way, property tax may be exempted completely or partially. According to the Department of Taxation and Finance in New York State, property tax can be waived when a property is owned by religious organizations or governments. Apparently, individuals can only enjoy the partial exemption on property tax if they fall in these categories:

• School Tax Relief.

School Tax Relief program only applies to school property taxes. To be eligible, the total income of you and your spouse should be less than $500,000. Under this program, the first $30,000 of the house value can be exempted, and this number will increase to $62,200 if you are 65 years old or older than that.

• Senior citizens exemption

For seniors older than 65, the taxable assessment can be reduced by 50% maximum. The annual income cap is limited from $3,000 to $29,000. Thus, the reduction will be less than 50% when your income exceeds $29,000.

• Veterans’ exemption

Veterans’ exemption is not available to school district and special district taxes. Eligible veterans are those who have served in the U.S. Army, Navy, Air Force, Marines and Coast Guard.

• Exemption for persons with disabilities

If seniors with disabilities can present certain evidence of their disability, they are qualified for this exemption program. The reduction policy is as same as Senior citizens exemption.

• Exemption for agricultural properties

Agricultural land can qualify only if there are seven or more acres that were used for agricultural purposes during the past two years.