Wife's age hurts reverse mortgage

Q. I am 78. My wife is 64. We own our home with a value of $550,000. No mortgage and no debts. We recently inquired about a senior citizen reverse mortgage and were told the best we can do is receive just $680 per month. The up-front fees would be about $13,000. The mortgage manager suggests we obtain a home equity loan instead. We have income of only about $60,000 per year. But we are cash poor and want to do some traveling. I know you recommend reverse mortgages. This doesn't seem like a good deal. Are we missing something?

A. The problem is you married a much younger lady. You could qualify for a very generous reverse mortgage based on your age alone and the home's market value.

But your young wife has a far longer life expectancy. Reverse mortgage lenders base eligibility on the age of the younger spouse who holds title. That's why the offered monthly lifetime $680 payment seems so low.

The simple solution is for your wife to quit claim her interest in the house to you. Then the reverse mortgage eligibility will be much higher, based on your age rather than hers.

Tax troubles

Q. In early 2005 we sold a rental house we had owned about 15 years. During that time, we refinanced the mortgage two or three times to take out tax-free cash. Thanks to market value appreciation, we sold for much more than our purchase price. However, when we talked with our CPA she advised us we have an "excess mortgage" tax problem. Although we netted only about $47,000 cash from our equity, she says we owe capital gain tax on about $120,000, plus depreciation recapture tax, because our mortgage balance exceeded our depreciated book value. How can this be?

A. Your CPA is probably correct. However, your mortgage balance has nothing to do with your capital gains and depreciation recapture tax upon sale of the rental property.

Although you thought you only had $47,000 equity, due to your refinancings the mortgage balance substantially exceeded your depreciated cost basis.

In other words, by refinancing you took out tax-free cash from your equity. But when you sold, that excess mortgage amount exceeding your basis became taxable.

Sue the seller

Q. My husband and I have a huge problem. On the very first night in our home, the sewer backed up and flooded the basement with raw sewage. We checked the seller's written disclosure form and it did not reveal any sewer problems. Then we talked with the neighbors and they told us the former owner had frequent sewer problems and they remember seeing the Roto-Rooter truck in the driveway frequently. The company we called charged us $750 to get the sewer working. But after running a camera down the pipe, they found the sewer pipe was completely broken. Our front yard had to be dug up and the pipe replaced at a cost of $4,000. Complicating matters is our 4-year-old daughter had just been diagnosed with leukemia. She has virtually no immune system and needs to be in a germ-free environment. My husband presented the $750 sewer bill to the seller. He laughed at us. The real estate brokerage, representing both seller and buyer, was of no help. I called 12 different real estate lawyers and none would take our case. They all said: "Disclosure forms are worthless." We talked with two different home inspectors and they said they probably wouldn't have discovered the problem because they don't inspect the sewer pipes. We only earned $38,000 together last year and spent every penny to buy this house so our daughter would have a clean place to live. Is there anything we can do?

A. Your shocking letter reminds us there are dishonest home sellers out there. In fairness, unless you have evidence the realty agents knew about the sewer problem and failed to disclose it, they probably have no liability.

Unfortunately, most homeowner insurance policies will not pay for sewer backup or repair costs. Even the world's greatest professional home inspector wouldn't discover the problem unless there was evidence of prior sewer backups in the basement.

Because you are cash challenged, I suggest you call the county bar association to see if they have a legal aid or pro bono program. Or a nearby law school might have a low- or no-cost student program that can help you.

Proving the seller's misrepresentation that he knew of the defect, which he failed to disclose, shouldn't be difficult, based on the evidence from the neighbors. The Roto-Rooter records can be obtained, if necessary.

You might consider suing the seller in Small Claims Court if you think you can prove the seller's misrepresentation by failing to disclose this serious defect.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.