Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
Today, Dr. Don answers questions
about reverse mortgages and first-time home buyer IRA withdrawals.
Reverse mortgages
Dear Dr. Don,
We are very interested in taking out a reverse mortgage, mainly
because our Social Security income is simply not sufficient. We
have been told that we can't do this because our home is worth $125,000
and the loan balance is $106,000. We were advised that we would
have to come up with an additional $36,000 in equity in order to
work a reverse mortgage plan. If you agree that a reverse mortgage
isn't right for us, do you have any suggestions as to how we might
continue to stay in our home?
Sally Stayathome
Dear Sally,
Reverse mortgages allow you to draw against the equity in your home.
These equity draws can be taken either in a lump sum or in periodic
payments. You are charged interest on the equity draws. The financial
institution recoups the equity payments and the interest when the
home is sold. After this debt is paid, any remaining equity is paid
to the homeowner. The lender needs a cushion against any downturns
in housing prices and for the capitalized interest. With only $19,000
or 15 percent equity in your home, you aren't a good candidate for
a reverse mortgage. The National
Center for Home Equity Conversion (NCHEC) maintains a Web site
that describes reverse mortgages in greater detail.
In addition, you can get more information on
reverse mortgages from several stories at this site. Check out this
explainer
piece and this one on shopping
for a reverse mortgage.
If your home is your only asset, I don't have
an easy answer to the question of how to keep your home and raise
cash to meet your living expenses. If you have a life insurance
policy with a cash value, you can consider redeeming or borrowing
against the policy.
First-time home buyer IRA withdrawal
Dr. Don,
I am a 41-year-old female, married and have a 4-year-old boy. My
name is on my sister's house, both the mortgage and deed. Originally
this house was under my name, my mothers' name and my sister's name.
My mother died three years ago, and before she died she took her
name out of the deed and mortgage. I do not live with my sister
and have nothing to do with the mortgage payments. My husband and
I want to buy a home and I have $55,000 in my 401(k). Can I transfer
$10,000 toward the purchase on my new home, even though I am not
a first-time home buyer, without any penalties or paying taxes?
My husband is a first-time home buyer and he has $15,000 in his
401(k). Can he transfer $10,000 toward the new home without any
penalties or paying taxes? I appreciate your help, as my plan administrator
has not been able to answer my question.
Claudia Consumer
Dear Claudia,
The IRS considers you to be a first-time home buyer if you had no
present interest in a main home during the two-year period ending
on the date of acquisition of the home which the distribution is
being used to buy, or build, or rebuild. If married, your spouse
must also meet this no-ownership requirement. If you are both first-time
home buyers, each of you can withdraw up to $10,000 for a first
home without having to pay the 10 percent additional tax on the
IRA distribution(s). IRS Publication 590, When
Can I Withdraw or Use IRA Assets?, provides additional details
about the first-time home buyer provision. It comes down to this
question: Do you currently have a main home? IRS Publication 523,
Selling
Your Home; Chapter 1 -- Main Home, would indicate that there's
not a problem taking penalty-free distributions from your IRAs.
If you'd
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and answers are intended only to assist you with your financial decisions. However,
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-- Posted: Aug. 28, 2000
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