By Marlowe Hamerston
MnSF Metro Region member

Many legislators look with lust and envy at seniors with paid-up mortgages and try to find ways to get some of that equity for government to spend. They erroneously suggest that seniors do not need protection from our regressive property tax system because seniors possess great property wealth. They fail to recognize that this wealth is not available to the homeowner until the property is sold. Should seniors sell their family homes and then be relegated to a tent city somewhere? The fact is that many seniors’ properties still have mortgages on them.

These seniors, like all Minnesotans with mortgages, are being taxed on their mortgage debt, not their equity wealth. Why is the value of a property taxed as wealth and the value of a stock portfolio not taxed in the same way? If ordinary Minnesotans are taxed on the principal of their investment in their home, why are not the wealthiest Minnesotans being taxed in the same fashion on their principal invested in stocks?

One way legislators suggest seniors can survive Minnesota’s unfair property tax system is to take out a reverse mortgage to pay taxes owed - taxes determined by a system that originated in an 1858 society that no longer exists. That was a society where property was used to grow crops. Minnesotans should not be required to mortgage their property to pay into an antiquated and out-of-touch property tax system.

To humor those who suggest seniors should take out a reverse mortgage, let us look at the pros and cons of whether a Minnesotan should take out a reverse mortgage? The short answer is that because of high fees it’s best to wait until you really need the money.

Like any mortgage, a “reverser” is a loan that uses the property as collateral. The difference is that the borrower doesn’t have to make monthly loan payments or have an income to qualify, although he or she must be at least 62. Instead, the debt and accumulated interest charges are paid off only when the property is sold - even if that’s not until after the borrower has died.

The loan can be taken as a lump sum, line of credit or a fixed monthly income that can continue for the borrower’s lifetime, even if the total received eventually exceeds the property’s value. Whatever the way that the money is taken, it is tax-free since it is a loan - not income. The total owed - principal plus interest - can never exceed the value of the property.

The lender cannot foreclose or require you to pay the debt during your lifetime, except in some extreme cases such as bankruptcy. So even if the home’s value were to fall, neither you nor your heirs would ever owe more than can be raised by selling the home. If the home ultimately sells for more than is owed, you or your heirs get the difference. (You can pay the debt off early, thus stopping interest charges from accumulating.)

The catch is the high costs compared to conventional mortgages. Among those are a 2 percent loan origination fee and a 2 percent insurance payment to protect the lender in case the property ultimately fetches less than the borrower owes. There’s also a 0.5 percent annual insurance fee. Up-front costs can generally be folded into the loan.

Currently, with the annual insurance fee included, interest runs from about 6.7 percent to 8.3 percent, compared to a little over 6 percent for a conventional loan. Also, most reversers are adjustable mortgages with interest rates changing every year, or even every month. Another drawback: You cannot borrow as much as your properly is worth. That helps assure the lender that the property will sell for more than is owed.

Finally, the amount you can borrow depends on your age, with an older borrower getting more because there’s less chance of debt growing larger than the property’s value.

Reversers are best as a last resort - and only after you’ve weighed alternatives such as conventional mortgages and home-equity loans. Of course, you also could sell the property and move someplace cheaper.

For more information, try www.aarp.org/money, which has a calculator that will show you what monies will be available to you in relationship to your age and your property’s market value. Be fully informed before taking this important step.

Under no circumstances should the reason for taking a reverse mortgage be so that government can continue its archaic property tax system. Our government is of the people, by the people and for the people and when a taxation system becomes oppressive, the system must be changed. That is what happened in 1776 and that is what needs to happen in 2006. Contact your senator and representative along with the governor and give them that message.