Idle Equity? A Reverse Mortgage Could Be the Answer.

Q: DEAR BOB: My husband and I, ages 74 and 77, live in our home worth about $900,000 for which we paid $125,000 in 1978. We have a remaining mortgage of $44,000 at 5.25 percent interest with $330 monthly payments. But we dislike sitting on all that "dead money" in our home equity. We have been investigating a reverse mortgage to pull out some of that money either to invest or to help our daughter buy a house. However, we are not interested in additional monthly income. Is a reverse mortgage the way to go? -- Darlene MacP.

A: DEAR DARLENE: Are you in reasonably good health and do you plan to stay in your home at least five years? If your answer is yes, then a reverse mortgage could be ideal for your situation.

Sitting on about $850,000 in idle equity must be frustrating. Giving your daughter the money to buy her house is like an advance inheritance if you are certain you will never need your home equity for personal use.

However, I do not recommend obtaining a reverse mortgage to use the cash for investments because chances of your earning at least as much as the money costs are slim.

Because a senior-citizen reverse mortgage must be recorded as a first mortgage, $44,000 of the proceeds will be used to pay off your current first mortgage.

I suggest you consult a reverse mortgage originator who represents the Federal Housing Administration, Fannie Mae and Financial Freedom Plan to compare their offerings. Because of your home's high market value, the Financial Freedom Plan will probably be best for your situation. You can find reputable reverse-mortgage lenders at http://www.reversemortgage.org/ .

DEAR BOB: Last October we bought a house in Minnesota. We like the neighborhood, but after we moved in, we realized we had bought a money pit. The house was offered for sale as-is. About a month after moving in, we had to replace the furnace for $6,000. Recently, our basement was flooded and we had to spend more than $10,000 replacing drain tiles and re-drywalling. Our contractor said the existing drywall was not installed to building code -- it had no insulation. The sellers were obviously house flippers, but surely our home inspector should have caught the defective furnace. Are the sellers liable for the defective drywall they installed? -- Brian G.

DEAR BRIAN: When a house is sold as-is, that doesn't excuse the seller from disclosing known home defects. An as-is sale means the seller must reveal defects but does not have to pay for repairs. Your big problem is proving the seller knew about the defective furnace and the incorrect drywall installation.

If you hired a professional home inspector, he or she should have inspected the furnace and discovered any dangerous condition such as a cracked firebox heat exchanger. The professional inspector's contract with you, however, probably limits liability, so do not count on holding the inspector liable unless you can prove the inspector was negligent and should have discovered the furnace defect. As for the defective drywall, it can be difficult to prove the sellers knew of it.

DEAR BOB: I added my neighbor and his wife as joint tenants with right of survivorship to my home, intending to leave it to them when I die. Will this create a tax problem for them? -- Don W.

DEAR DON: This was a mistake. You gave up control over your property in case you need to sell it to pay for your nursing home care. If you decide to sell it, they can demand their share of the sales proceeds. Worse, they can refuse to sell and you would have to bring a partition lawsuit to force a sale, with them getting two-thirds of the sales proceeds.

As gift recipients, your neighbors' basis in the property becomes your probably low adjusted cost basis. When they eventually decide to sell, they will owe a substantial capital gains tax.