Property Taxes and Retirement

• When planning for retirement, one of the big challenges is estimating property tax increases. While the tax rate itself may not change significantly over the course of one's retirement, the appraised value of one's home will increase steadily due to inflation. Increases in the appraised value lead to an increase in the actual dollar amount due in taxes each year. Unforeseeable factors like prolonged periods of inflation, housing bubbles and unscrupulous assessors can result in property taxes that easily outstrip a resident's fixed income.
  
  

How A Reverse Mortgage Works

• A reverse mortgage is a loan for an amount equal to some portion of the house's value. In exchange, all payments made to the borrower (including all interest accrued on them) are added to a single lien that the lender claims on the property. Meanwhile, the loan doesn't need to be repaid until the borrower dies, the house is sold or the borrower leaves to move into an assisted living facility.
  
  The loan can be paid to the borrower as a single lump sum, a line of credit, monthly payments or some combination of the three. Interest is accrued only on payments made to the homeowner. Once the borrower leaves the property, the lender's lien allows him to claim the balance of the loan from the sale of the house.
  
  

Qualifications

• In the United States, a person must meet a number of requirements before he can qualify for a reverse mortgage. The owner must be at least 62 years of age and the property must be his primary residence. The property must be either a single-family home or a two- to four-unit dwelling whereby the borrower is also the owner. The property must be debt-free -- that means no liens, no unpaid taxes, no second mortgages and no home equity line of credit.
  
  

Reverse Mortgage Terms

• While the borrower inhabits the house, he must obey three basic rules: pay the property taxes, pay for homeowner's insurance and keep up with necessary maintenance and repairs. If the borrower fails to comply with any of these rules, the lender reserves the right to demand immediately full repayment. If the borrower is unable to do this, the lender can use its lien on the property to force a sale.
  
  

Usage of Funds

• Unlike a mortgage, the principal from a reverse mortgage has no usage restrictions. The borrower can use payments to pay property taxes, but he can also invest them and use a part of the subsequent profits to pay any taxes.
  
  Even though reverse mortgage payments are cash, they aren't counted as taxable income by the IRS and don't affect Medicare or Social Security benefits. However, if monthly payments aren't spent within the month they are received, the IRS counts the unspent balance as personal assets. Increasing the total value of someone's personal assets can make him ineligible for need-based public assistance programs such as Medicaid, Supplemental Security Income (SSI) and Federal Old-Age, Disability and Survivor's insurance.